National Economic Council/National Economic Advisers
FEDERAL REPUBLIC OF SOMALIA
ASSESSMENT OF FINANCIAL INTEGRITY INSTITUTIONS IN SOMALIA
National Economic Council (NEC) Working Paper Lead Contributor: Aues Scek and Contributor: Hussein Siad January 2019
Contents
I. Foreword ...... iv II. Executive Summary ...... iii II.1 Key Findings ...... iii II.2 Anti-corruption ...... iv 1. Background ...... 10 2. Recent Developments ...... 3 3. Methodological Approach ...... 7 4. Assessment of Key Financial Integrity Institutions ...... 9 4.1. Key Findings ...... 9 4.2. Specific Institutional Findings ...... 10 4.2.1. Public Financial Management ...... 10 4.2.2 Anti-corruption Agency ...... 13 4.3. Supreme Audit Institution (Auditor General’s Office) ...... 15 4.4. Public Procurement (Tender Board) ...... 16 4.5. Parliamentary Budget and Finance Committee (BFC) ...... 18 4.6. Financial System (Central Bank) ...... 20 4.7. Integrity in National Civil Service Commission ...... 22 5. Conclusions and Recommendations ...... 24 Annex 1: Limits and Gaps in the Somali’s Integrity Institutions ...... 27 Annex 2: Status of Financial Integrity Institutions ...... 28 6. References ...... 33
Abbreviations
AML/CTF Anti Money Laundering and combating the financing of counter terrorism
AFROSAI African Organization of Supreme Audit Institutions,
CAMEL Capital, Assets, Management, Earnings, Liquidity
CPI Corruption Perception Index
CIT Component Implementation Teams
CSOs Civil Society Organizations
FGC Financial Governance Committee
FATF
FGS Federal Government of Somalia
FIIs Financial Integrity Institutions
INTOSAI International Organization of Supreme Audit Institutions
INPB Interim National Procurement Board
MTB Money Transfer Businesses
NCSC National Civil Service Commission
OAG Office of the Auditor General
PCU Project Coordination Unit
PFM Public Financial Management
SFMIS Somalia Financial Management Information System
TI Transparency International
I. Foreword
II. Executive Summary
Somalia stands at a critical juncture that will determine its future as a peaceful and democratic country. The Federal Government of Somalia (FGS) is in the process of addressing difficult security situation in the country and, what is certain is that long term stability can be secured only with sustained efforts to tackle mismanagement and corruption in the country.
Corruption and insecurity are a real concern for Somalia, a country which in most of the past decade including 2017 and 2018 was ranked last out of 180 countries on Corruption Perception Index of Transparency International1. Also, most Somali believe that corruption is a serious problem in their daily lives. World-wide experience shows that pervasive corruption undermines the ability of the state and its institutions and provides fertile ground for criminal networks to operate freely. It is also a well-known fact, that corruption deprives the poor and vulnerable group of basic essential services and limits their access to human rights. By weakening the bonds of trust between citizens and the state, it heightens the risk of a perpetuated conflict.
The Government has made clear its commitment to fighting corruption through a comprehensive reform agenda. To support these efforts, the National Economic Council/National Economic Advisors have undertaken an in-depth research to establish a comprehensive picture of the country’s key financial integrity institutional landscape regarding accountability, transparency, and integrity. This study represents an important milestone in that for the first time, key branches of government institutions, have been analyzed for the vulnerabilities of Somalia to corruption, and the effectiveness of its national anticorruption efforts. Crucially, the assessment was carried out in close consultation with the key financial and fiscal institutions and other relevant public agencies. It aims to serve as a foundation for much needed anticorruption reform in the country. II.1 Key Findings
The FGS is committed to promoting sustained and inclusive growth. This requires robust institutional foundations, sound policies, good financial and economic governance, and skilled human capital to implement reconstruction and development programs. Currently essential financial integrity institutions are suffering from significant capacity deficiencies, and inadequate legal framework, physical infrastructure, and human capital. On-going2 reform programs are nearing completion and it is time for a new generation of reforms aimed at consolidating gains achieved, as well as extending capacity building interventions to focus on financial integrity institutions. Moreover, the current tight fiscal space, with extremely limited capacity to raise revenue, combined with the challenging security situation, and poor working fragile environment, make it difficult to attract skilled professionals into the public sector, limiting the Government’s capacity to deliver public goods. Some major achievements were made in economic and financial governance during the past few years, notably the re-establishment of (a) the Central Bank of Somalia, which has been adopting
1Transparency International 2018: Corruption Perception Index 2018 Report https://www.transparency.org/cpi2018#detail
2 https://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Somalia_- _Economic_and_Financial_Governance_Institutional_Support_Project__EFGISP__Phase_II_-_Approved.pdf
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international standards and codes for improved systems of transparency and accountability; (b) The OAG has been re-established with the recent appointment of a qualified Auditor General, the OAG is adopting the International Standards of Supreme Audit Institutions (ISSAIs), and is implementing a 3-Year Strategic Plan developed in accordance with INTOSAI standards. c) The formulation and implementation of Federal budgets, with effective execution though progressing at slower pace; (d) Creation of the debt management unit; (e) the establishment of the civil service electronic payroll system; (f) the deployment of a Somalia Financial Management Information System (SFMIS). Furthermore, the FGS3 has developed new policies and instruments to underpin the next generation of public financial management (PFM) reforms.
Key elements still being adopted include the enactment of the Public Financial Management bill, which is still pending in parliament. Other legislations recently put in place include: The Public Procurement, Concessions and Disposal (procurement) Bill and the Auditor General’s Bill, is before parliament and it is important the bill is enacted into law to provide a solid legal foundation for major reforms in the SAI to progress. Implementation and rollout of these new policies and laws require significant technical and financial resources to strengthen institutional capacity at the level of the MoF and other central ministries. Despite the recent progresses many weaknesses remain in the current PFM system, both at the federal level at ministries, and at states levels. Limited state capacity to formulate policies, raise adequate revenues and allocate resources effectively are key impediments to strengthening critical financial integrity institutions.
Currently, most of the institutions are operating at interim (on transitional basis) basis without adequate legal framework, the required organic structure, and the needed human resources. These weaknesses are observed in the draft regulatory framework for public financial management institutions. For example, the draft PFM Bill suggests that the OAG has to be under the MoF, while the Bill of the OAG proposes the OAG to be independent and be answerable in its budget and reporting budget to Parliament budget and finance committee. II.2 Anti-corruption
One of the problems facing the country is the fact that those in positions of power both formal (government) and informal (clan and kinship networks) assert strong influence over the decision- making processes, allowing for immunity. Some government officials, and political leaders use the weaknesses of the integrity institutions to serve their own interests and by making appointments for important positions in public institutions outside the set competitive norms.
Non-meritocratic appointments have undermined the accountability in public institutions and weakened public trust in government. Such external interference is exacerbated by the highly insecure environment in which law enforcement agencies operate.
The results point out to a dysfunctional governance system in which corruption goes largely unpunished. As many citizens do not report incidence of crimes to the government institutions, but rather to religious institutions or to their own clan leaders. This clearly undermine the legitimacy of the already fragile state.
3 https://somaliampf.net/files/Financial_Governance_Report_(English).pdf iv
The government has made progress in several areas, demonstrating that where the political will for reform exists, change is possible. One example in the area is the approval of the legal framework to establish the Constitutional Anticorruption National Commission and to enact the Auditor Generals Bill. The two institutions are to lead the fight against corruption and to operate the system that oversee the required systems and activities in the public sector with a stated policy of zero tolerance for corruption.
Somalia as a fragile state faces numerous governance challenges, which need to be addressed if sustained stability is to be achieved. Fighting corruption is a long term undertaking that requires substantial political commitment and implementation of reforms, which are realistic and well sequenced, and combine solutions that take into account cultural and dynamic changes. The following are the key recommendations:
Anticorruption
• Define clarity on the role of each institution involved in the fight against corruption, including the newly established Anticorruption Commission, the Independent Office of the Auditor General Office, the State Procurement Agency and etc.; • Establish a strong and effective independent Anti-Corruption Agency to implement, coordinate, and provide oversight to anti-corruption polices and activities in all government agencies; • Consider putting in place a mechanism for greater coordination and cooperation between and among the integrity institutions to support the fight against corruption. • Consider, establishing an inter-agency forum for these institutions both at the political and technical levels with clear terms of references supported by a functioning secretariat.
Public Financial Management
Somalia has been making efforts to implement PFM reforms in the past few years. However, the approach used was not homegrown and focused more on one size fits all, by importing practices applied elsewhere that didn’t fit in. The offered solution lacked clear and consistent legal framework. Therefore, PFM requires a comprehensive approach that reflects the reality on the ground, led by committed leadership and endowed adequate financial resources and capable personnel. These include:
• People include: (a) Leadership and team buy-in, (b) MoF to lead and champion reforms, (c) Capacity of the government-at-large, (d) Consider outcome-driven technical assistance with human resource as the greatest dependency; • The PFM legislative framework (laws must support PFM), including compliance and control, an effective financial management information system, which is playing key role in the budget formulation and execution. Have the SFMIS delivers critical PFM deliverables fiscal control and financial compliance which are essential to PFM success; and • Successful PFM requires the right people, streamlined processes, and enabling technology. Office of the Auditor General Office (OAG)
The Office of the Auditor General (OAG) is one of the key institutions that strive to enhance accountability in public operations. Theoretically it is supposed to be an independent entity, v
accountable to Parliament, which approves the budget of the OAG according to its draft bill. The bill describes the duties and responsibilities of the office. Somalia’s OAG is a member of African Organization of Supreme Audit Institutions, and International Organization of Supreme Audit Institutions (AFROSAI-E and INTOSAI) respectively. Therefore, it’s supposed to follow international auditing practice to bring improvements in financial management of the government and liaison to strengthen relations with the Budget and Finance Committee of Parliament.
In January 2019 the Parliament approved the Auditor General’s bill that is now pending signature of the President.4 Currently the OAG has been one of the weakest pillars of Financial Integrity System in the country. Its overall performance has weakened over recent years, mainly due to lack of a legal framework, and financial and human resources. The lack of skilled professional staff, that have technical audit knowhow, has remained a major obstacle to its effectiveness.
Strengthening the accountability of the OAG requires the following:
• Clearer regulations on its own reporting requirements, including strict deadlines for submitting activity and financial reports, and the requirement for such reports to be submitted to, and discussed by, the Budget and Finance Committee, and then by Parliament, before submission to the President; • The OAG should be given the power to impose administrative and/or budgetary sanctions in cases of irregularities or failure to cooperate on the part of any audited institution; and • The legal framework of Auditor General including regulations and systems should be implemented fully.
State Procurement Systems
On transitional basis, the Interim National Procurement Board (INPB) through GFC has been acting on behalf of the procurement agency. Overseeing the contracting of all FGS concessions and any contracts above US$ 2m in value until such a time as procurement Act is finalized and made operational. In the meantime, the Financial Governance Committee is also covering procurement operations on behalf of the government. The Financial Governance Report (2017)5, noted with concern that some FGS agencies bypass the FGC and the INPB altogether and do not face any penalties for violating the agreed rules.
The prime minister and the minister of finance have begun to act on FGC recommendations for some contracts. Introducing competitive and transparent public procurement system including standard bidding documents for supplies and works for national and international competitive bidding, a user guide for the standard bidding documents for the procurement of supplies, procurement procedural forms, and a proposed organizational structure and job descriptions for the Public Procurement Authority.
Actions to be taken include:
• Finalize and implement procurement bill and start implementing the Act; • Make procurement procedures more open and efficient in order to increase competition; and
4 The parliament has approved and pending senator approval and Presidential signature. 5 https://mof.gov.so/news/release-2018-financial-governance-report vi
• Set clear rules for the evaluation of bids and making evaluation criteria public.
Central Bank of Somalia
The CBS is the monetary authority of Somalia and its main responsibilities include: Formulate, implement and be responsible for monetary policy and implement the foreign exchange policy; hold and manage the foreign exchange reserves of Somalia; license, regulate and supervise all banks and financial institutions to foster the liquidity, solvency and proper functioning of a stable financial system; and formulate and implement such policies to promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems; act as banker and advisor to, and as fiscal agent for the Government and public entities. Also, the bank acts as sole issuer of legal tender Somali currency notes and coins; and compiles, analyzes, and publishes the monetary, and financial and other statistics covering various sectors of the national economy. Recommended actions:
• Strengthen the independence of the Central Bank and ensure there is no any interference by the Ministry of finance on the CBS policy and strategy; • CBS acts as an independently authority in designing policy, making policy decisions, and implement those decisions; • Strengthen and empower the Central Bank by building its reputation and credibility. A strong and able Central Bank with a clear monetary policy and capacity to deliver would help the government secure the trust of the public; and • Strengthen the prudential process regulation, supervision and examinations of commercial banks.
Budget and Finance Committee of Parliament
With all its weaknesses the BFC of Parliament has taken steps to establish its oversight role. It has repeatedly asserted its legal role in approving large concession contracts and sought to renegotiate or cancel a number of contracts that have been brought to its attention. Parliamentary committees have summoned ministers for questioning of these contracts. The Parliamentary Budget and Finance Committee conducted a public hearing on several occasions, the few audit reports, and a procedures manual was developed to enable it to do its oversight role on a consistent basis in the future.
• MPs should have the appropriate knowledge and capacity to draft laws, to be gained through institutional capacity building, and training of committee members; and • Budget and Finance Committee should develop the capacity to adequately assess the Auditor General’s reports.
National Civil Service Commission
National Civil Service Commission (NCSC) is the main agency responsible for supporting public sector activities and human resource development in Somalia. It is responsible for administrative reforms and providing training and services to civil servants in all public institutions. In this regard, the public sector agencies are required to follow the set guidelines for recruitment, promotion and retirement rules and regulations. However, owing to widespread political interference and inadequate financial and human resources capacity of the NCSC, the recruitment processes are vii
not followed, and an irregular, unaccountable, and poorly managed system is practiced in the public sector.
• Professionalize and de-politicize the public sector to ensure efficient and impartial delivery of basic services to citizens; • Focus immediate reform efforts on the Independent Administrative Reform and National Civil Services Commission (NCSC); • Provide to NCSC adequate financial and human resources to operate and to lead by example in eliminating political interference from within its own ranks; • Ensure that the appointment, promotion, and dismissal of all civil servants is based on merit rather than political considerations or personal connections; • Appointment procedures and outcomes must be fully transparent and civil servants’ salaries and benefits6 should be based on a uniform, transparent and adequate salary structure financed from the government treasury; and • Those appointed to key posts should be selected based on a track record of integrity and demonstrated leadership qualities and merit.
Remarks
Even though Public Financial Management and Financial Integrity Institutions have been given top priority by the FGS in all its programs this was not reflected in the implementation of policies and resource allocation. The financial integrity institutions have been under resourced and marginalized for several years. They require sustained support to be empowered to perform their functions. Very little information has been made available for external audit or parliamentary review and scrutiny, and institutions have been starved of resources and subjected to targeted criticisms and blamed of not delivering on the tasks assigned to them. Under these circumstances, significant support must be granted to the OAG and BFC of Parliament, CBS, NCSC to fulfil their roles, together with the other governance institutions. This process is a long one. The government and development partners should not be distracted by the proliferation of new financial accountability institutions, which will fragment scarce reform capacity.
4 https://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Somalia-Country_Brief_2017-2020.pdf
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1. Background Somalia’s emergence from prolonged civil conflict is being constrained by poor economic governance and inadequate capacity of Financial integrity institutions to formulate and implement sound policies for economic and social revitalization. Inadequate institutional capacity undermines the attainment of sustainable national security, social stability, and building credible and effective integrity institutions7. Rebuilding and enhancing economic and financial governance is critical for ensuring proper management of the country’s resources and implementing home- grown economic policy reforms.
The most important task facing Somalia today, except for security and national reconciliation, is the restoration of effective good governance and building public trust and credibility in Government operations. This fact is true of most countries recovering from severe and prolonged conflicts. Without good socio-economic governance, strong adherence to the rule of law, and delivery of justice and security, stability and recovery are not attainable.
Accountability, transparency, and integrity—all mutually reinforcing—are the key pillars of good governance. Where there is effective financial accountability, public sector performance is managed and reported fairly, and positive governance is observed. This in turn curtails systemic corruption; and mitigates fraud, waste, and abuse in the use of public resources. Accountability is the objective to deliver one’s responsibility in a proper manner and to be answerable to actions taken. Transparency entails free access to governmental activities, operations and decisions that should enable citizens to monitor government policies, operations, and final outcomes. Integrity is the use of public resources in accordance with authorized purposes with honesty and trustworthiness in the discharge of duties.
There is broad consensus that recent Somali Governments have made modest progress (at best) in building credible financial integrity institutions to implement enhanced economic management, accountability and transparency in government operations. Insecurity in the country has played an important role in the weak economic recovery and poor financial integrity, but the legacy of the crisis in public financial management in Somalia predates the prolonged conflict years and needs to be addressed with a fundamental improvement of the national commitment, and a dramatic transformation of the leadership culture to manage public resources.
The recently established National Economic Advisers (NEA) of National Economic Council initiated a process of undertaking comprehensive assessment on the state of the economic and financial governance in the country. This assessment is aimed to assist the authorities to formulate policy and strategies on evidence based and solid information to strengthen financial integrity. The results of the findings once completed will be submitted for discussion and deliberation of the National Economic Council (NEC) at its consultative meetings organized on a periodic basis.
This report is organized in five main sections. Following this background, section two provides a brief historical narrative of Somalia`s foundation of integrity institutions, and socioeconomic foundations since the early 1991. Section three describes the methodological approach used for data collection, collation and analysis of the results. Section four focusses on the assessment of seven core areas of financial integrity institutions, specifically the agencies responsible for: Public
7 Assessment of Financial Integrity Institutions in this study include among others: public financial management entities, the Central Bank, anti-corruption agencies, Auditor General Office, procurement agencies, NCSC and Parliamentary external scrutiny committee. 10
Financial Management; Anticorruption, Procurement; Auditor Functions, Central Banking; Budget and Finance Oversight committee of parliament, and National Civil Service. The FGS has pursued a reform agenda with ample support from development partners, including the World Bank, DFID, EU and the AfDB. The analysis in this report is limited to the key areas in which reforms have transpired, and where important interventions have been made as in the PFM, the operations of the Auditor General, procurement, and anticorruption agencies; and where major gaps between the intention of reform and its implementation and achievement transpire.
Section five provides basic conclusions and recommendations on the reform agenda to address real problems and challenges facing the financial integrity institutions.
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2. Recent Developments The collapse of Central Government authority and the resulting political vacuum led since 1991 to the destruction of state institutions and agencies that have been responsible for economic and social management. Powerful warlords and those loyal to them limited the opportunity for open and fair collective governance within the Somali society. This has been exacerbated by prevalence of violence and insecurity, which restricted political, and social activities nationwide through regular attacks against democratic forces and government officials. Deep divisions along sectarian and political lines have been exacerbated by the support of external actors that has been counter to stabilization, state-building and development. Weaknesses in the provision of key services, including security, by the authorities have allowed armed opposition to establish alternative institutions at the community level, which challenge the legitimacy of formal government institutions.
The 2012 Provisional Constitution of the country and other existing laws provide fundamental guarantees - the civil and political rights of citizens, legal protection, and democratic processes for political and economic competition. However, these rights are not widely protected in the country. Of concern are reports of excessive use of force, arbitrary arrest, extortion, and extrajudicial killings by local militias and Al Shabab. These actions are largely allowed to go unpunished on account of weak judicial system, which is lacking capacity to provide the most basic services. Violence has been reduced, since the formation of the recognized Federal Government in 2012 with the ousting of the Al Shabab from major towns. But attacks by terrorist groups continue to be perpetrated against innocent people and government officials. While women have formal rights to education and employment, and some are participating in public life, discrimination and domestic violence remain pervasive, with the latter often going unreported.
Article 22 of the Provisional Constitution8 allows political parties, civil society groups, and other associations to register and function as political, social, and economic organizations, but as of now there are no real political parties fully established and operational in the country.
The recent emergence of a range of interest groups, such as youth, women, and Civil Society Organizations (CSOs) are positive signs, but their dependence on external forces undermine their capability and trust from the public. As a result, most CSOs, social and cultural organizations, associations, and interest groups pursue their own limited agenda, with little concerns to citizens interests. Nevertheless, there are organizations and associations, which can exert pressure on the government and influence policies and decisions. But since the political elite in Somalia is concentrated in a small group of well-connected individuals, the public has little political influence and/or room to demand transparency from the government.
8 http://hrlibrary.umn.edu/research/Somalia-Constitution2012.pdf\
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The socio-economic situation of Somalia has improved in the past decade, particularly when compared to the period of the civil conflict (2000-11). These changes were made possible by the initiatives of both domestic and international support to rebuild Somalia’s devastated economic infrastructure and institutions and elevate the living standard of the people. The economy has picked up, thanks largely to investments by Somalis particularly from the diaspora and international investors in small and medium enterprises in service sector and communication.
According to the World Bank9 poverty remains prevalent in Somalia. Mogadishu has a poverty rate of 72 %, while other urban areas have a poverty rate of 46% and pastoral population and nomads have a poverty rate of 72%. Somalia being one of the world’s least developed country continues to face serious economic and social problems. Insecurity and corruption threaten efforts to establish an inclusive, growing, and self-sustaining economy that attracts investment, promotes trade and creates jobs.
According to the IMF, economic activities10 in 2018 recovered from the 2017 drought. The more favorable rainy season supported the economic recovery, particularly in the agricultural and livestock sector. Increased activities in the construction, communication, commerce, and service sectors were sustained. As a result, real GDP growth and inflation were projected at 3.1 and 3.5 percent (from 2.3 and 5.5 percent in 2017), respectively.
The most dynamic service subsectors have been ICT - Communication, Finance & Insurance, Construction and Transport, with wholesale and retail trade lagging at a lower growth. These are all service sectors directly or indirectly connected with international trade and aid.
The negative11 impact of the prolonged conflict on economic development has set back national wealth creation for decades. Major adverse effects and consequences of the conflict include the destruction of public property, loss of private and public assets, and massive departure and displacement of professional and skilled personnel. The loss of economic and social assets built over decades, and the drain on human capital, has significant financial, institutional and social costs.
The three decades of conflict impoverished the population, endangering the survival of millions of Somalis. Comprehensive macroeconomic and social data are not available but guess estimates from various sources suggest that Somalia’s economy regressed considerably since the collapse of the central government in 1991.
With the establishment of the Federal Government of Somalia in 2012 and the recapture of Mogadishu by AMISON and SNA from Al-Shabaab, the construction sector has been flourishing and businesses in the service sector, such as shopping centers, restaurants, hotels, airlines, mobile money, telecommunication and financial services have been reviving and operating all over the country. Several airlines now offer flights to Mogadishu. On the negative side the construction boom has trigged land conflicts, as title deeds are either unavailable or forged, and people who were displaced by clan militias started to reclaim land and buildings they previously owned. Somalia’s economy is edging toward recovery, as economic growth in recent years has been steady despite persistent and deep fragility. Nominal GDP is estimated to have reached US$6.7 billion US$ in 2016 from the US$ 6,6 billion in 2015. While the real growth of GDP from 2016 to 2017 was slow and reached around 2.5 in 2017. This indicates that GDP growth weakened in 2017 due to severe drought and flooding during the year. A decomposition of growth in 2017
9 http://documents.worldbank.org/curated/en/325991506114032755/pdf/AUS19442-REVISED-PUBLIC-Somali-Poverty-Profile-Update-4- 27-November-2017.pdf 10 https://www.imf.org/en/News/Articles/2018/09/21/pr18353-imf-staff-concludes-visit-to-somalia 11 https://www.goodreads.com/book/show/11511720-somalia-crisis-in-economic-and-financial-management 4
suggests that most of the growth slowdown was driven by contraction in the agriculture sector activities, while the service sectors remained healthy and grew at relatively stable rate. Poor rain combined with flooding and fragile security led to the reduction of agriculture production, which, as a result, negatively contributed to subsequent spike in food prices observed in the first half of 2017. The economy is projected to grow in the range of 3.5 percent during the period 2018 -2020.
Fiscal foundations - the state of public financial management, the Federal Government fiscal operations are inhibited by multiple factors, including the lack of adequate financial resources from own sources, as the domestic tax base continues to be insignificant. Weak tax administration capacity and poor tax compliance attributed to three decades of insecurity, and absence of sanctions on non-complying taxpayers and tax exemption has proven rife.
Fiscal development - according to the World Bank12 fiscal policy has significantly improved, but challenges remain. Domestic revenue grew by 26.5%, from $112.7 million in 2016 to $142.6 million in 2017 driven by trade taxes. Donor grants almost doubled to $103.6 million in 2017 from $55.3 million in 2016 – a remarkable performance with 85% of the commitments being realized compared to only 50% realized in 2016. Despite the improved performance, the government is still struggling with basic challenges in its fiscal operations. Recurrent expenditures account for almost all expenditure, with capital spending accounting for just 3% of total spending in 2016 and 2017. Weak expenditure controls result into ad hoc cash rationing to ensure balanced budget and zero accumulation of arrears hence, affecting overall budget execution. Current spending priorities focus on the security and administrative services which account for almost 90% of total spending hence crowding-out provision for the economic and social services.
The total government expenditure rose from a GDP ratio of 2 percent in 2015 to 3.5 percent in 2017. This represents a continuation of the rising trend of the importance of government spending in the Somali economy both as important driver to growth and improvement in social services and security.
Recurrent expenditures have been absorbing most of the mobilized revenues, leaving limiting fiscal space for development spending. Recurrent expenditure has been averaging at around 90 to 95 percent of total expenditure, while capital expenditure around 3 to 7 percent in the recent years.
FGS maintained a relatively good revenue performance since 2015. The total collected revenue in 2017 amounted to 3.5 percent of GDP, which is somewhat higher compared to 2.8 percent achieved in 2015. This is still lower compared to the expected expenditure growth in the coming year.
According to the World Bank study on Revenue Mobilization13 if a combined set of reforms (administrative, coverage of tax base and restructuring) are implemented these would scale up revenue relative to current situation and reach a level of 13.2 percent of GDP by 2022, permitting much larger government expenditures. However, it should be noted that this is equivalent to the lower end of the observed range in lower-income countries. This would be an optimal result in the improvement in revenue mobilization if the proposed reforms are implemented. In the medium term if wider tax reforms are implemented administration capacity improved the share of revenue to GDP would increase to 17.9 percent by 2022.
12 World Bank 2019: Somalia Overview; www.worldbank.org/en/country/somalia/overview 13 World Bank 2017: Somalia Economic Update Mobilization of Domestic Revenue http://documents.worldbank.org/curated/en/552691501679650925/Somalia-economic-update-mobilizing-dom
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The Challenge of low revenues and pressing needs to deliver public services has made budget making in Somalia very difficult. With territorial recovery from Al Shabab, the FGS is facing pressure to deliver services, as evident from the its budget expenditures allocation of available resources. The budget shows rising budgeted expenditures and optimistic revenue mobilization. This led to weak budgeting process, poor allocation of resources through continuous spending trimming due to weak revenue collection.
On the financial foundations – The Somali financial sector even though nascent, is playing a critical role in the country’s economic activities. The development of an embryonic financial sector currently comprising six domestic commercial banks; 14 licensed Money Transfer Businesses (MTB), is progressing at a slow but steady pace. The most pressing obstacles to increased financial intermediation include: (i) absence of centralized payment and inter-bank payment systems; (ii) weak re-licensing, supervision, regulation, and compliance of MTBs, which has significant implications for securing inflows of remittances to Somalia; (iii) shortcomings in the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) framework and its weak implementation, which can negatively affect correspondent banking relationships; and (iv) a still-weak central bank capacity and widespread Somali shillings (SOS) counterfeiting. The contribution of the Diaspora remittances to the Somali economy is significant and large, estimated be around 23% of GDP14. There is a challenge, however, because the correspondent banking relationship (CBRs) have been fragile and could be withdrawn in any instances due to AML/CFT issues and this is having an impact on the Somali financial sector.
The Financial Sector should have capacity to deliver the needed development impetus for Somalia. The main objectives of the financial sector reforms are to allocate the resources efficiently, increasing the return on investment and accelerated growth of the real sectors in the economy. Owing to protracted insecurity, the financial sector institutions in Somalia are in disarray with few qualified professional staff. The commercial banks and money transfer institutions have slowly been building their capacities by injecting the system with young graduates and hires from the Diaspora. The sector will also require financial capacity for data collection, compilation, analysis, and dissemination which is currently limited.
The Somali economy is highly dollarized, leaving the CBS with limited capacity to manage the national currency. The stock of the Somali currency in circulation consists of a mix of official and counterfeit bank notes accumulated over the years. All major transactions are conducted in US dollars and the local currency is used for small transactions only. The largest or the only denomination shilling note is of 1000 sh. The Somali monetary authority are not able to directly affect the volume of currency in circulation or, better said, do not practice or introduce monetary instruments. To reverse this situation the CBS with the support of the IMF and the WB initiated currency reform and are taking the necessary steps before the introduction of new currency. This include restoring credibility of domestic currency to allow the CBS to engage in effective monetary policy.
14ReliefWeb 2018: Remittances and Vulnerability in Somalia - ReliefWeb https://reliefweb.int/sites/reliefweb.int/files/resources/Remittances%20and%20Vulnerability%20in%20S 6
3. Methodological Approach The study focuses on an evaluation of the key financial integrity institutions in the country’s governance system with regard to the legal framework, overall institutional capacity, internal governance systems and procedures, and roles in the overall integrity system. The assessment approach used in the study provides a framework to analyze both the vulnerabilities of Somalia and the effectiveness of its key financial integrity institutions. These include all branches of government, but more specifically the Ministry of Finance in its public financial management role, Anticorruption and Procurement Agencies, Auditor General, Central Bank, Parliamentary Budget and Finance Committee and the National Civil Service Commission. The key ‘pillars’ of the Financial Integrity Institutions framework are presented in Figure 1 below.
Figure 1: Somalia Key Financial Integrity Institutions
Framework for key integrity Institutions
Finance Committee Committee Finance of Parliament Parliament of Agencycorruption - Auditor General Auditor Procurement Agency Procurement
Anti Ministry of Finanace (PFM) (PFM) Finanace of Ministry Central Bank (Financial System) (Financial Bank Central Budget and and Budget Commission Service Civil National
The framework is expected to deliver a comprehensive picture of the public institutional landscape regarding integrity, accountability and transparency. As it is well known, a properly functioning integrity system serves as a barricade against corruption and guarantor of accountability, while a weak system typically harbors systemic corruption and produces a myriad of governance failures. The review is expected to yield a comprehensive outline of reform needs and understanding of their political and technical feasibility.
The proposed approach15 intends to use both quantitative and qualitative (participatory and consultative) methods of data collection. It, inter alia, included interviews and, interactions with the leaderships, senior government officials of the Financial Integrity Institutions (FIIs) namely the Ministry of Finance, Central Bank, Auditor General’s Office, Anti-corruption and procurement agencies, and the Parliamentary Budget and Finance Committee, NCSC and any operational Anti- Corruption agency. The researchers adopted an overall approach that ensure active consultation of key stakeholders.
15 Adopted from TI tools: https://www.transparency.org/files/content/nis/NIS_AssessmentToolkit_EN.pdf 7
Primarily, the study was conducted by a multidisciplinary team of experts composed of two NEA resource persons and several data collectors and data analysts. The qualitative was collected by combining select-elite interviews and focus group discussions and feedback, as well as interview with key informants. In addition, interviews with leaderships, senior government officials and others informed stakeholders and those associated with the debate on public resource management. Most of these are people are actively involved in the effort to establish proper and transparent pubic financial management system.
This diagnostic exercise is characterized as a ‘light evaluation’ of key financial integrity institutions, is conducted in five stages: - Initial stage: a month visit in Mogadishu- Federal capital to consult with the stakeholders and Federal authorities on the design of the inception report. Plan the evaluation, collect documentation, conduct initial interviews with the key stakeholders and adjust the review approach to issues raised by interlocutors, then finalize the inception report with the NEA team and issue an inception note which summarizes the work to be undertaken at that point. - Given the scope of the study and the timeframe, the fieldwork will concentrate on gathering evidence from a large volume of documentation and a range of stakeholders’ consultations, including international donors, World Bank, UNDP etc., Non-Government Organizations (NGOs).
- Second stage: a three - day field visit by the team leader to Berlin at the Transparency International to contact and consult with key management and technical staff involved in one way or another on the compilation of the TI (Transparency International) Somalia Corruption Perception Index and analysis.
- Third stage: collates and analyze collected data and prepares a draft report.
- Fourth stage: presents the draft policy report at policy forum for review and discussions. - Fifth stage: Finalization and production of the final report.
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4. Assessment of Key Financial Integrity Institutions 4.1. Key Findings The study reveals that most of the established financial integrity institutions during the past decade and half were established to respond to the challenges that Somalia was facing. Most of these institutions were however established without clear and comprehensive mandates and strategy. They lacked adequate resources, and human and institutional capacity. Today, there are many institutions partially established with weak structure and overlapping responsibilities and sometimes with duplicating mandates that lead to conflicting interest in addressing issues of financial transparency and accountability.
The government has been carrying out reform programs on Public Financial Management systems, including fiscal decentralization processes. The newly established agencies, such as the Auditor General, Procurement (tender board), Central Bank, Anti-corruption agency and several others have been established without any clear policy framework on how they are supposed to operate. There is no systematic coordination mechanism in place to provide a comprehensive roadmap of reforms and guide policies in the long run.
Several efforts were made to strengthen the legal and regulatory framework to establish the foundation of a sound PFM system, but negligible results have been achieved. The PFM bill is still pending in parliament even though it was drafted and submitted to Parliament in 2011. Weaknesses within the draft PFM bill, which include many conflicting features, are hindering the establishment of a sound PFM practice.
The Federal Government of Somalia (FGS) is committed to promoting a sustainable and inclusive economic growth. This requires robust institutional foundations, sound policies, good financial and economic governance, and skilled human capital to implement reconstruction and development programs. Currently essential financial16 integrity institutions are suffering from significant capacity deficiencies, inadequate legal framework, poor physical infrastructure, limited financial and human capital resources. On-going reform programs are nearing completion and it is time for a new generation of reforms aimed at consolidating gains achieved, as well as extending capacity building interventions to focus on financial integrity institutions. Moreover, the current tight fiscal space, with limited capacity to raise revenue, combined with the challenging security situation, and poor working environment, make it difficult to attract skilled professionals into the public sector. World Bank 2018 quote17: “The state institutional apparatus is brittle because of interlocking systemic challenges, such as low capacity, administrative bloat, poor fiscal management, and regional contestation. The consequent inability of the government to deliver crucial services erodes its legitimacy, which makes raising revenue even more difficult and sets a fiscal trap for Somalia. Changing the situation will be challenging and will take years. Meanwhile, for most Somalis services will be provided informally by a mix of state, social, clan-based. and private actors.”
Some achievements were made in economic and financial governance during the past ten years, notably the re-establishment of (a) the Central Bank of Somalia, which has yet to succeed18 in adopting international standards and codes of conduct and improved systems for transparency and accountability; (b) The re-launch of the Federal Government Budgets, which is progressing gradually; (c) The creation of the debt management unit (d) The establishment of the civil
16 World Bank 2018: Somalia Systematic Country Diagnostic 17 Ibid 18 Ibid
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service payroll; (e) the deployment of the Somalia Financial Management Information System (SFMIS). Furthermore, the FGS has developed new policies and instruments to underpin the next generation of PFM reforms. Among the key instruments still being developed are the Public Financial Management, which is still pending in Parliament and the Public Procurement, Concessions and (Disposal) bill and the Auditor General bill referred to parliament for further consideration and many other legal frameworks are pending approval (see Annex 2). Implementation and rollout of the new legislation and policy reforms require significant technical and financial resources to strengthen institutional capacity. Despite the above-mentioned progress there are several weaknesses in the current PFM system that need to be addressed, both at the level of the MoF and line ministries, and at state levels. Among them include limited state capacity to formulate policies, and to raise adequate revenues and allocate resources for improved services delivery are key impediments to state building and strengthening critical financial institutions.
Currently, there are several transitional (interim) institutions operating without legal framework and systematic structure, and weak personnel capacity. The weaknesses are in the regulatory framework for public financial management institutions, particularly in coordinating the different efforts in the area of financial accountability, which lacks a comprehensive roadmap of reforms to guide policy formulation and execution. For example, the draft PFM bill suggests that the OAG should be under the MoF, while the OAG bill proposes the OAG to be independent with its own budget and directly reports to Parliament.
4.2. Specific Institutional Findings 4.2.1. Public Financial Management Structure and Organization Due to its extensive complex nature as a multisectoral institution, the PFM is being operated under umbrella of the Ministry of Finance (the Center of PFM related processes) in Somalia, with the aim of overseeing, aggregate fiscal discipline, allocative efficiency, ensuring operational efficiency and follow due process by being transparent, with information publicly accessible, and by applying democratic checks and balances to ensure accountability.
Institutionally the PFM is a project attached to the Director General of the MoF as a unit headed by a PCU “Coordinator” and assisted by the World Bank Monitoring and Evaluation Officer and Communication Officer continues to coordinate the PFM Reform activities through the development and strengthening of collaboration with all Component Implementation Teams (CITs), including the supervision of the Subject Matter Experts (SMEs) and Technical Assistance Consultants working under various components of the project. The PCU in addition continues to monitor the implementation of various contracts in line with the work plan, implementation timelines and contractual agreements. As the focal point of the project, the PCU coordinator continues to serve as the key point of contact and liaison between the Ministry of Finance of the Federal Government of Somalia and the Bank and vice versa.
Legal Framework - The PFM Bill drafted in the 2011 was not taken through the approval process to the Parliament as required by the law to upgrade and strengthen the existing legal framework. This could be interpreted as an indication of weak commitment and poor ownership from the leaderships to speed up the approval process for sound PFM systems. On other hand, it has been observed by the World Bank and IMF that the government made considerable efforts towards establishing the foundations of a sound PFM system in some areas. But there is still much to be done to achieve a level of performance to ensure significant impact on the outcomes of aggregate fiscal discipline, strategic allocation of resources and efficient, transparent and accountable public services delivery. 10
Considerable efforts were made towards establishing the legal foundations of a sound PFM system by the FGS in many key areas. Major achievements by the Federal Government include several transitional or interim institutions, which have been established, such as commissions and committees that were put in place to undertake some of the programs and activities of PFM. Among the key ones were: Financial Dispensation Management Board; Financial Governance Committee; Special Financing Facility; and Recurrent Cost and Reform Financing, etc.. During this period the performance of the PFM was not satisfactory, despite the efforts made by the Somali PFM program with substantial technical and financial support from donors.
The analysis on the performance of the PFM reveals several key strength and remaining weaknesses. The weaknesses include:
The Strengths include the following: The World Bank and the EU decision to provide budget support and implement substantial financial programs on budget through the treasury single account was a clear indication of confidence in the country system. The related operations are implemented through government-wide systems, which have been developed to a great extent with donor funded technical assistance.
The PFM bill is in Parliament going through the standard process of the enactment procedures and it is hoped to get approval in the forthcoming sessions. On a transition basis the Financial Governance Committee (a joint government and donor agency) is being used to oversee partially the Somalia PFM system.
According to HESPI (2017)19 Credibility of the budget is deficient. There have been significant differences between budgeted revenue and expenditure and their outturns in the four years of 2013-17. Expenditure and revenue outturns were below budgeted levels for all the four years at both aggregate and individual institutional levels. On the performance of PFM in general the following key weaknesses were observed:
• Comprehensiveness20 and transparency of the budget requires substantial improvements. Despite recent efforts, there are extra budgetary expenditures through some government institutions that are financed by earmarked tax and non-tax revenues. Inter- governmental transfers from the FGS to Federal Member States (FMS) are not yet fully rule-based and transparent. Information on budgets and their implementation, though existent, is not accessible to the public; • Policy-based budgeting and sectoral analysis are lacking. Debt sustainability analysis is only undertaken in the context of the IMF-supported Staff Monitoring Program. There are no well-defined policies for medium-term expenditure strategies (only for the budget year); • Predictability and control in budget execution need to be improved. While the budget process incorporates consultation between the line ministries and the Ministry of Finance, intra-ministerial budget processes remain weak; • Accounting, recording and reporting systems are deficient for operational decision making. Accounting transactions are captured through the ‘vote book’ system and are reported on the same basis as the budget. In-year budgetary reports are submitted to the Ministry of Finance by line ministries, but they are not reconciled with bank records and are of poor quality; and
19 HESPI (2017) Somalia Institutional Assessment fhttps://www.academia.edu/36020379/Final_Report_on_Somalia_Financial_Integrity_Dec_13_2017a.pdf
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• External scrutiny suffers from a severe delay in the submission of the Auditor General’s reports to Parliament. Scrutiny of external audit reports has not been undertaken recently, owing to lack of capacity of the Budget and Finance Committee (BFC) of Parliament.
The FGS has affirmed its commitment to fiscal discipline and fiscal transparency. To meet this commitment, the MoF is charged with the responsibility to work with the stakeholders on a reform plan, negotiate technical assistance agreements and lead the implementation process. The Federal Government launched, with the support of development partners, a PFM program and a Roadmap which set out intentions to strengthen PFM based on a three-year framework. The weaknesses of the institutional factors supporting PFM reform include:
• Government Leadership and Ownership. Following FGS-donor agreement on the need for credible plan for PFM strengthening. The process of PFM roadmap was developed, co-led and owned by the MoF and donors led by the World Bank. A PFM Reform Unit coordinated the activities across the FGS and had been charged with the responsibility to lead the process. • Donors still use off–budget channels for most aid to Somalia, with on-treasury support at around 8%, far below the 15% target set by the government. During the year 2018 the World Bank and EU decided to put more funding on budget and implement the support through the treasury single account. The related operations are to be implemented through government-wide systems in the coming years.
Capacity and Resources A Government PFM Reform Coordinator was trained on the job on project management and made responsible for day-to-day coordination of the reform activities and serve as the key interlocutor for the Component Implementation Teams (CIT) and ensuring proper sequencing of activities expected to be funded by various donors. The PFM Subject Matter Experts were provided technical assistance with a clear capacity building and exit strategy with skills transfer arrangements (handholding approach) by embedding the arrangements within the government structures to work closely with the CITs that was to be led by the Heads of the key PFM institutions. Annual public PFM Forums were planned to solicit a change of mindset and garner support for the PFM reforms to be transformative. So to say the capacity the overall capacity of the PFM unit seems to be adequate with external support, but whether it is sustainable in the long is very questionable one the project is completed.
The PFM through the technical and financial support it receives from the donor has adequate resources both human and financial needed to undertake key reforms program. What remain to be seen is how fund the PFM programs once project activities are completed. Recommendations • Continued effort is required from all stakeholders to ensure that sound PFM laws are passed and implemented. • Finalize the revisions of the PFM bill and establish regulatory institutions to assist in the implementation of the PFM Act, • Through the implementation of the PFM legal framework enhance FGS’s financial management credibility which are needed to provide a pathway towards debt relief and new lending from international financial institutions; • Strengthen institutional cooperation and coordination between auditor general, parliamentary committee on budget and finance committee to build transparency and accountability;
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• The government needs to disseminate the laws, implement them, and train staff in their use. Years of de facto PFM practice that diverged from an outdated legal framework means that adherence to laws and regulations is weak; • PFM reforms will need to be complemented with intensive support to other change management dimensions.
4.2.2 Anti-corruption Agency Structure and Organization: Somalia is one of the world’s poorest countries having suffered from decades of economic fragility, political instability, insecurity, and poor socio-economic governance. The Corruption Perceptions Index (CPI) report of the Transparency International (TI) and the Mo Ibrahim report21 both ranked Somalia as the most corrupt country in the World in 2018. Emerging from civil conflict the country is still characterized by endemic poor governance performance and weak integrity institutions. All these contribute to low state legitimacy, ineffectual capacity, weak rule of law, and volatile levels of political instability and insecurity.
In this context, corruption opportunities continue to flourish. In addition, donors, with all their good intentions to help establish effective transitional institutions have all too often unintentionally undermined long-term institution-building, and by passing national decision- making structures. Examples include the establishment of the Financial Dispensing Management Board and Financial Governance Committee and others doing the operational works of the PFM and PFM institutions, including the work of the Procurement agency and Auditor General. There has been little attention paid to the relation between transitional oversight and delivery mechanisms for long-term national institutions development.
Legal Framework - Somalia established the Federal anticorruption Commission in 2011, but it did not make any progress except signing the African Union Convention on Preventing and Combating Corruption signed on 23 February 2006 and the African Charter of Democracy, Elections and Governance [ACDEG] (which Somalia signed on 28th January 2013). it lacked a clear policy, adequate resources and leadership. Otherwise the agency remained just on paper and never operational.
Looking from historical lens could help understand what may be unique about Somalia’s classification as the most corrupt country. The problem of corruption in Somalia should be seen to be materially different from that of other countries, in that it is characterized more by lack of public institutions rather than the abuse of public institutions by private rent-seekers. The frailty of public institutions in Somalia is rooted in pre-conflict legacy of fragile statehood, as well as almost three decades of civil conflict, which created a political economy that privileged and preserved informal power-holders through clans and other mechanisms (tribal democracy) who have been able to resist attempts to formalize and legalize the exercise of power by practicing the unwritten law of power sharing formula.
Decades of civil conflict has fundamentally transformed the Somali society, weakening the traditional and cultural norms that once prevented the sorts of accumulation of wealth and abuse of power that Somalia has witnessed since the new political order established in 2004 in Mbagathi, Kenya. This, coupled with an international effort that has treated state-building generally and anti-corruption in a haphazard way, has created the seemingly intractable problem we are facing today. Yet Somalia does not have a legal framework on a National Anti-Corruption, but the 2012 Provisional Constitution criminalizes several forms of corruption, including abuse of office, bribery
21 http://s.mo.ibrahim.foundation/u/2017/11/21165610/2017-IIAG-Report.pdf 13
of national and foreign officials, embezzlement, and trading in influence. The government does not implement the constitutional guidelines on anticorruption effectively, and officials engage in corruption with impunity. The governing elite are also known to be continuously involved in allegations of embezzlement of public funds from the already meagre Somalian coffers, as neither appointed nor elected officials are subject to financial disclosure laws22 (GAN Integrity 2016)
Capacity and Resources The anticorruption institutions are dysfunctional, and there are barely any mechanisms in place to curb corruption as the things stand today. Nevertheless, following the failed attempt to institutionalize the fight against corruption through the establishment of the anticorruption commission in 2011, the parliament (in October 2018) approved the bill for establishing the Constitutional Anti-corruption Commission, which is expected to lead the fight on corruption and mismanagement in country. This is expected to contribute to the process of anticorruption efforts and build the capacity of anticorruption institutions.
For what concern resources both financial and human, the anticorruption institution being a constitutional (regulatory) institution is entitled to receive adequate funding from the federal budget. In addition, support from both domestic and international communities so it can operate independently from political interferences.
Recommendations Over and above the key recommendations, the Anticorruption institution should focus on establishing and strengthening its institutional architecture within the Integrity institutions. This include clarifying, in line with UN, African and Arab principles and conventions.
Specifics Recommendations:
• Initiate the development of the anti-corruption strategy through an inclusive process engaging all stakeholders, including the civil society, private sector and public officials at large; • Establish an independent anti-corruption commission based on international standards as stipulated in United Nations, African and Arab Anti-Corruption Conventions; • Accelerate development of anti-corruption laws that are under consideration led by the Office of the Prime Minister and Ministry of Justice; • The civil society organizations should be meaningfully engaged throughout the process of implementation of the commitments including the development of the anti-corruption strategy, and the relevant laws; • The political and judicial leadership must forcefully enforce sanctions, and penalties on the misuse of public funds, and rebuild awareness and enforce application of rule of law; • The Federal Government and Federal member states should develop and implement an anticorruption strategy, which include measures to ensure compliance and oversight means to investigate corruption cases; • The anticorruption commission should be mandated with prevention and investigations of corruption, and governed by a law that meet international standards; • The commissions should be well resourced, enjoying a protected and adequate budget, suitably qualified staff with opportunities to develop, and a strong leadership to foster and drive forward strategic goals; and • The commission should have clear line of accountability and sound ethics politics to avoid political bias oc conflict of interest within the agencies.
22 GAN Integrity 2016: Somalia Corruption Report https://www.business-anti-corruption.com/country-profiles/somalia/ 14
4.3. Supreme Audit Institution (Auditor General’s Office) The OAG is supposed to be the key audit institution, responsible for overseeing and auditing the financial activities of the government, government-funded institutions and public–private partnerships. The purpose of the OAG is to enhance fiscal transparency and public accountability in all government operations.
Structure and Organization: The Office of the Auditor General (OAG) is one of the key institutions that strive to enhance accountability in public operations. Theoretically it is supposed to be an independent entity, accountable to Parliament, which approves the budget of the OAG according to its draft bill. The bill describes the duties and responsibilities of the office. Somalia’s OAG is a member of African Organization of Supreme Audit Institutions, and International Organization of Supreme Audit Institutions (AFROSAI-E and INTOSAI) respectively. Therefore, it’s supposed to follow international auditing practice to bring improvements in financial management of the government and liaison to strengthen relations with the Budget and Finance committee of Parliament.
Legal Framework: The Parliament approved the Auditor General’s bill in January 2019 that is now pending signature of the President. 23. The bill is expected to determine the independence of the office, tenure of the Auditor General and autonomy in staffing and budgeting to enhance the Office’s independence.
The OAG has been one of the weak pillars of Financial Integrity System in the country. Its overall performance has weakened over recent years, mainly due to deficiency in the legal framework, and inadequate financial and human resources. The lack of skilled professional staff, that have technical audit knowhow, has remained a major obstacle to its effectiveness.
Independence: The 2012 Provisional Constitution of the Federal Government of Somalia provides for the establishment of an independent office of the Auditor General. The Draft Federal Audit bill has many important features, including the independence of the OAG in determining an audit methodology. The Auditor General is appointed by the President with the approval of Federal Parliament, and the Office shall have an independent budget to be submitted each financial year to the Parliamentary Budget and Finance Committee for consideration and approval. The office can recruit its own staff stating the caliber of staff required for efficient performance of its functions and has unrestricted access to information and books of accounts of the auditees.
The key observed weaknesses -strength of the OAG include among others the following:
• The OAG, as a member of INTOSAI and AFROSAI-E, has adopted the International Standards of Supreme Audit Institutions (ISSAI) for carrying its audits (compliance, financial and performance audits. Rigorous training is being conducted appropriately to all staff. However, this is still in infancy stage. • Lack of adequate communication strategy weakens transparency. The Auditor General must report at least annually, and no later than three months after receipt of the public accounts from the Accountant General and from Heads of Spending Agencies. Although reports are produced, there is no written internal and external communication strategy, thus weakening awareness and transparency; and • The delivery of the OAG’s duties and responsibilities are hampered by lack of technical and financial resources.
23 The parliament has approved the bill, which is pending senator approval and Presidency. 15
The Act is expected to strengthen the Office and provide a legal framework on its operations. As it provides clearer regulations on its own reporting requirements, including strict deadlines for submitting activity and financial reports, and the requirement for such reports to be submitted to, and discussed by, Budget and Finance Committee of Parliament before they are submitted to the President. The Office is also given the power to impose administrative and/or budgetary sanctions in cases of irregularities or failure to cooperate on the part of any audited government entity or public–private partnership.
Recommendations
• The Office of the Auditor General should aim to increase transparency and accountability at all levels of government on efficient and effective use of public funds. To discharge those duties and responsibilities vested in OAG, the capacity of the Office should be strengthened and adequately resourced and staffed with qualified professional; • Improvement in policy for internal and external communication; relevant OAG information made publicly available and widely distributed; and well-developed website and Intranet; • The OAG also requires well-functioning relationship with Parliament/ President, Prime Minister, and Audited entities; as well as Internal Audit, Media and Public, Professional Associations, academic institutions and Private Sector Auditors, Peers and Aid Donors; • Strengthen the accountability of the OAG by providing clearer regulations on its own reporting requirements, including strict deadlines for submitting activity and financial reports, and the requirement for such reports to be submitted to, and discussed by, the Budget and Finance Committee of Parliament before they are submitted to the President; and • Empower the OAG to impose administrative and/or budgetary sanctions in cases of irregularities or failure to cooperate on the part of any audited government entity or public–private partnership.
4.4. Public Procurement (Tender Board) Structure and Organization: On transitional basis, the Interim National Procurement Board (INPB) is the procurement agency mandated by the Federal Government of Somalia to oversee the contracting of all FGS concessions and any contract above US$ 2m in value until such a time as procurement Act is finalized and made operational. In the meantime, the Financial Governance Committee is also covering procurement operations on behalf of the government. The Financial Governance Report (2017)24, noted with concern that some FGS agencies bypass the FGC and the INPB altogether and do not face any penalties for violating the agreed rules.
On the other hand, there have been some encouraging signs where, more contracts are starting to be submitted to the FGC/INPB in draft form, and FGS has demonstrated its commitment to the competitive tendering of rations contracts for the security sector. In addition, in line with FGC advice, FGS is moving to strip out the cash component that is included in the rations contracts and pushing to pay rations cash directly to personnel through the salary payment system. Less encouragingly, some contracts are still being signed without following any evident due process. A lack of transparency around the disposal of public assets is also an increasing concern to the FGC, as such disposals serve to generate public mistrust and sustain perceptions of corruption.
24 FGS 2018> Financial Governance Report https://mof.gov.so/news/release-2018-financial-governance-report 16
Legal Framework: The 2012 Provisional Constitution25 Article 124, stipulates: “A law enacted by the Federal Parliament shall provide the framework for financial management with the following characteristics among others: (a) The preparation, timetable and procedure for presenting the budgets of Federal Member States and districts in a transparent, accountable and efficient manner; (b) Guarantees by the Federal Government for loans raised by Federal Member States; (c) Procedures that the Government will follow for public procurements; (d) Auditing of accounts of non-governmental bodies that receive government funding; and General measures necessary for the implementation of this Chapter.” However, as of now no specific laws have been passed by Parliament regarding public competitive bidding. The Council of Ministers, in May 2014, passed a bill for competitive bidding for public procurement, but it has not yet been approved by Parliament.
In practice, despite improvements observed in the details contained in advertised bids and the time provided for bidders to prepare their offers, not all tenders follow open and competitive bidding. For instance, the Financial Governance Committee (FGC), reviewed several major procurement contracts awarded by the government and revealed that none of them “were tendered competitively, nor did they respond to any pre-defined terms of reference or scope of activities”. Citizens are not able to access the results or documents associated with procurement contracts (full contract, proposals, execution reports, financial audits, etc.), as no central archive exists. Although individual government agencies have offline archives, these are only accessible to bidders, but not to the public. Citizens are also not able to obtain any information on companies found guilty of having violated procurement regulations. The absence of a tracking mechanism implies that such companies can face either imprisonment or a fine, as outlined in the Somali Penal Code, but are not banned by the law to participate in future bidding.
Capacity and Resources The FGC has been playing a leading role in reviewing FGS concessions and contracts above $5m in value on behalf of the procurement agency. Since August 2016, it has been working closely with the Interim National Procurement Board (INPB), which has been mandated by FGS to oversee the contracting of all FGS concessions and any contracts above $2m in value.
Given the very low levels of procurement capacity within FGS, at the recommendation of the Financial Governance Committee the Government extended the procurement transition period until such a time as there is adequate capacity for implementation of the Procurement Act. Specifically, this should involve extending the mandate of the INPB and specifying interim procurement roles and responsibilities within FGS prior to full implementation of the Procurement Act. Now it is to be seen how the capacity build within the Financial Governance Committee in the procurement area can be transferred to the Procurement Agency to implement the new Act.
Donors need to step up their support to FGS procurement; significant levels of operational support and capacity building are required both within the Ministry of Finance and across line ministries.
Recommendations
• Establish an independent statutory procurement body that is accountable to the public, and publish information on awards, contract alterations, and the execution, performance and
25 Federal Republic of Somalia Provisional Constitution, 2012, Articles 122 and 124 (a, b, c, d and e) https://www.globalintegrity.org/wp-content/uploads/2015/07/The_Federal_Republic_of_Somalia_Provisional_Constitution_2012.pdf
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completion of awarded contracts. The procurement body should ensure the independent monitoring of important government contracts. Public sector agencies, i.e., ministries, Central Bank, etc. need to be required to report to the legislature and the public; • Build adequate procurement capacity with significant levels of operational support within the MoF and across line ministries; • Donor through the FGC need to step up their support to build and transfer capacity to the local institutions; • Implement the procurement act and set out all the steps and procedures to be followed by the institutions and state the consequences of noncompliance; • Make sure that the public procurement legal framework and institutions are operational and the institutional capacity and legislative framework to handle robust public procurement are in place; and • The Act provides for an independent oversight body to formulate policy and regulate public procurement, concessions and disposal of assets practices in the country.
4.5. Parliamentary Budget and Finance Committee (BFC) Structure and Organization: The Budget and Finance Committee (BFC) of Parliament is concerned among others with the “oversight and external scrutiny of budget policies and operations, legislation and measures to monitor and evaluate public resources and expenditures in the country”. The BFC scrutinizes bills, policies and programs tabled before the Parliament and conducts oversight on reports of the Auditor General and recommends appropriate measures for actions among others.
In addition, the BFC plays a key role in ensuring financial integrity of public sector operations by relying in a significant way on credible examination and objective reporting by the OAG in the interest of good governance, transparency and greater public accountability. For the BFC to perform its functions well, it is necessary that the OAG be delinked from the Public Service and given autonomous status and placed under Parliamentary oversight for its budgets and personnel autonomy. The Auditor General should be accountable for ensuring its meticulous delivery of the annual Audits of the government’s financial accounts on a timely basis to the BFC. Legal Framework: The central role of the legislature in the budget process is set out in the 2012 Provisional Constitution and the draft PFM Bill. Where effective oversight of budgets by the parliament is essential in holding the executive accountable for budget formulation and implementation, thereby ensuring effective and efficient service delivery to the citizens.
The Committee (BFC) is supposed to play an integral part in the approval process of the national budget and review reports from the Auditor General on public expenditures. Financial management processes channeled through the Committee are theoretically in place for some major issues or are in the process of being developed.
The Committee has focused its attention on reforming Somalia’s financial and fiscal sector legal framework. Several bills and laws have been either enacted or are under consideration by the Federal Parliament, including: the procurement, anti-money laundering, and public finance and tax bills. The PFM bill is being considered by the BFC and Parliament as it has been redrafted and resubmitted for consideration. The Budget and Finance Committee (BFC) of Parliament has been performing poorly in accordance to its mandate, in its oversight functions and the fight against corruption. The Committee activities and performance have been constrained by inadequate or lack of strong legislation. Also, it could not perform its duties well because of limited capacity of its members and lack of professional support staff to assist in the delivery of its responsibilities. Other major 18
challenges include insufficient time to review budget formulation/approval documents as they are delivered before the dateline expire; lack of clear rules distinguishing the functions of the executive and legislative in the budget process; lack of functional oversight of budget execution reports; limited capacity of committees to hold the government to account.
Capacity and Resources There are limited provisions in place that provide the legislature with adequate financial, human and infrastructural resources to effectively carry out its duties. Therefore, The BFC needs quick building of its institutional capacity26. This requires that the members of the BFC have appropriate knowledge and capacity to draft laws and follow their implementation and should develop the capacity to adequately assess the OAG audit results and oversee fiscal operations.
Due to deficiency in human resources, legal, technical, and functional capacities, members of the BFC are not able to effectively perform their assigned duties. There have been many attempts to exert pressure on the Parliament to conduct its business according to the preferences and desires of the Executive, but the Parliament has been able in many instances to withstand this pressure. However, this tension has created some gridlock between the Executive and the Parliament and in some cases, affected the activities of the government.
Recommendations
• Create a legal framework that require the executive to provide budgetary information to the legislature and sure public officials face serious legal repercussions if they do not respond to information requested by the parliamentary budget and finance committee; • Budget and Finance Committee should develop the capacity to adequately assess the Office of the Auditor General audit results and a mechanism should be developed to allow audited entities to challenge audit results, other than via the President alone; • Give adequate time to BFC to review and approve the budget (the time lapse between the submission of Budget approval). The legislature and the public should be given enough time to scrutinize the budget and related documents; and • The Parliament should ensure proactive publication of information on its activities and decisions in a systematic way, including the publication of its agendas ahead of time and the publication of voting decisions of its members.
26 Chemonics 2018. STRENGTHENING SOMALI GOVERNANCE (SSG) PROJECT https://www.chemonics.com/wp-content/uploads/2018/11/Strengthening-Somali-Governance-SSG-Objective-1-Extension-Final- Report_UPDATED2.pdf 19
4.6. Financial System (Central Bank) Structure and Organization: The Central Bank of Somalia (CBS) was re-opened by the Transitional Federal Government of Somalia in November 2009 after being inoperative for nearly two decades. The CBS is the monetary authority of Somalia and its main responsibilities are the formulation and implementation of monetary policies for price stability and developing banking and credit to ensure the growth of the national economy in a balanced manner.
Legal Framework: The CBS was reestablished pursuant to Article 123 of the Provisional Constitution (2012) and is operationally independent. The functions of the Bank are guided by the CBS Act no. 130, which became effective on 22 April 201227. This law sets the objectives of the Bank as to:
• achieve and maintain domestic price stability; • foster and maintain a stable and competitive market-based financial system; and • support the general economic policies of the Government.
The law defines the functions of the Bank as to: Formulate, implement and be responsible for monetary policy and implement the foreign exchange policy; hold and manage the foreign exchange reserves of Somalia; license, regulate and supervise all banks and financial institutions to foster the liquidity, solvency and proper functioning of a stable financial system; and formulate and implement such policies to promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems; act as banker and advisor to, and as fiscal agent for the Government and public entities. Also, the bank acts as sole issuer of legal tender Somali currency notes and coins; and compiles, analyzes, and publishes the monetary, and financial and other statistics covering various sectors of the national economy.
There are currently two laws in place related to the financial sector, namely The Central Bank of Somalia Act and The Financial Institutional Law of 2011. In accordance to the financial legislation, no banks or Hawalas can operate without initially obtaining a license from the Central Bank. Commercial banking activities are being strengthened and the sector is expanding gradually. There are now six domestic commercial banks and 14 licensed Hawalas or money transfer companies (MTBs), and the country economy is almost fully dollarized. The authorities envisage several important reforms to revive the financial sector.
The most pressing obstacles to increased financial intermediation include: (i) absence of centralized payment and inter-bank payment systems; (ii) weak re-licensing, supervision, regulation, and compliance of MTBs, which has significant implications for securing inflows of remittances to Somalia; (iii) shortcomings in the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) framework and its weak implementation, which constrain correspondent banking relationships; and (iv) weak central bank capacity and widespread Somali shillings (SOS) counterfeiting.
The monetary and financial sector agenda of the Government, which is the responsibility of CBS, include currency reform, financial sector development, and establishment of effective regulations for money-transfer businesses. The latter includes improvements to the legal and operational framework to address money laundering and combat the financing of terrorism, which should facilitate the remittance inflows that are critical for supporting economic activity and reducing poverty. These policies were approved by Parliament but are still pending full implementation to strengthen the whole financial system.
27 https://www.centralbank.gov.so/index_html_files/Central%20Bank%20of%20Somalia%20Act%20L 20
The CBS is slowly adopting international standards, codes of conduct and improved systems for transparency and accountability. Good central banking requires a thorough understanding of financial institutions, markets, and systems infrastructure. For monetary policy purposes, understanding the role of financial institutions and markets in the transmission process from central bank decision-making to their ultimate economic effects, aids efficiency in policy implementation. However, the CBS is constrained by weak capacity at four levels: financial resources availability, infrastructure, staffing levels, and staff skills. The human resource challenges facing CBS include; developing skills capacity to sustain recent gains and make improvements; and manual maintenance of HR records.
Somalia didn’t have access to international financial markets for over three decades, and it is still struggling to put in place all necessary measures to gain access. This requires that the CBS settle arrears with creditors and build a track record of public financial management to warrant debt relief. The CBS was also unable to address issues related to: (i) advising government on macroeconomic issues; (ii) developing monetary and exchange policies and regulating money supply; (iii) being the financial agent in issuance of debt; (iv) setting a payment system. In this context, the CBS is far from delivering the tasks assigned in its mandate, so the functionality leading to independence, transparency and accountability will have to strengthen and made operational.
Capacity and Resources
The World Bank28 suggests that the CBS will need greater capacity if it is to ensure financial stability. Given planned currency reform (issuance of small-denomination shilling bills), it will need to build capacity to manage reserves, develop management capacity and monetary policy instruments, and identify an exchange rate regime. Also, Somalia will need to enforce an AML/CTF framework consistent with FATF requirements. For commercial banking, the CBS now has a bank licensing program, methods for periodic reporting, a system for bank financial analysis, and the CAMEL (Capital, Assets, Management, Earnings, Liquidity) bank supervisory scoring system, and (c) The creation of the debt management unit.
Even though progress has been made on improving the capacity of the Central Bank remains weak. The human, legal and material resources of the Bank are limited. The bank is not yet able to show a capacity to regulate and manage and supervise commercial banks and Hawalas. The IMF29 (2018) suggests that the sector severely suffers from structural problems, including, but not limited to (1) absence of centralized payment and inter-bank payment systems; (2) weak re- licensing, supervision, and regulation of commercial banks and MTBs; (3) shortcomings in the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework and its weak compliance; and (4) a still-weak central bank capacity and widespread SOS counterfeiting.
Recommendations
• Strengthen the independence of the Central Bank and ensure there is no any interference by the Ministry of Finance on the CBS policy and strategy; • CBS acts as an independently authority in designing policy, making policy decisions, and implement those decisions;
28 World 2018: Somalia Systematic Country Diagnostic http://documents.worldbank.org/curated/en/554051534791806400/pdf/SOMALIA-SCD-08152018.pdf 29 https://www.imf.org/en/Publications/CR/Issues/2018/02/26/Somalia-2017-Article-IV-Consultation-and-First-Review-Under-the-Staff- Monitored-Program-45662
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• Strengthen and empower the Central Bank by building its reputation and credibility. A strong and able Central Bank with a clear monetary policy and capacity to deliver would help the government secure the trust of the public; • Strengthen the prudential process regulation, supervision and examinations of commercial banks; and • Regulate the use of mobile money and limit the transactions that can be made with mobile money.
4.7. Integrity in National Civil Service Commission Structure and Organization: National Civil Service Commission (NCSC) is the main agency responsible for supporting public sector activities and human resource development in Somalia. It is responsible for administrative reforms and providing training and services to civil servants in all public institutions. In this regard, the public sector agencies are required to follow the set guidelines for recruitment, promotion and retirement rules and regulations. However, owing to widespread political interference and inadequate financial and human resources capacity of the NCSC, the recruitment processes are not followed, and an irregular, unaccountable, and poorly managed system is practiced in the public sector.
Legal Framework: The Provisional Constitution30 (Article 118) stresses that the: (i) Civil servants and public employees31 shall exercise their functions in accordance with the law and solely in the public interest; and (ii) Permanent jobs with the government may be earned only by an open competition, except in the circumstances described by law.” In addition, there are some rudimentary provisions in the Civil Servants Law on transparency, accountability and integrity of public sector agencies, but they are set aside and often not observed at any level. Somali Penal Code (Article 282)32 requires that civil servants report any offense of which she/he has had knowledge in the exercise or by reason of her/his function, however, no law exists to protect public sector whistleblowers from recrimination or other negative consequences. Also, there is no law that prevents conflict of interest, nepotism, cronyism or patronage, and there are no restrictions on civil servants entering the private sector after leaving the government.
In Somalia, as in many post-conflict countries job opportunities are scarce and government jobs highly sought and are very competitive. In addition, it is very common for the Director Generals of the ministries to be either transferred or replaced after a new minister enters the scene, there is the unwritten 4.5 formula, based on power-sharing agreement among Somalia’s major clans, which assigns job opportunities on a clan basis.
Capacity and Resources The amount of human, financial, and physical resources available to NCSC are very limited. It continues to depend upon the yearly amount of aid provided by the donors for project financing. In addition, a limited amount allocated through the annual budget from the national treasury. According to senior staff of the NCSC the financial resources allocated through the budget are inadequate in fulfilling the NCSC’s essential requirements to perform its duties effectively. As a result, the NCSC is not able to effectively carry out its oversight role in overseeing all the work of public sector, including appointing civil servants across the public sector. Preventing political interference in the recruitment and management of civil servants.
30 Federal Republic of Somalia Provisional Constitution, 2012, Article 118 (1 and 5) https://www.globalintegrity.org/wp- content/uploads/2015/07/The_Federal_Republic_of_Somalia_Provisional_Constitution_2012.pdf 31 Somalia Civil Service Law 11, 2006 http://workspace.unpan.org/sites/internet/documents/unpan039443.pdf 32 1963 Criminal Procedure Code of Somalia - Nuhanovic Foundation, http://www.nuhanovicfoundation.org/user/file/1963_criminal_procedure_code_of_somalia_-_eng 22
Recommendations
The commission should act as an impartial body free from the influence of the Government, and political leadership. Professionalize and de-politicize the public sector to ensure efficient and impartial delivery of basic services to citizens, specifically: • Make the NCSC autonomous and focus reform efforts on de-politicizing its functions; • Provide the Commission adequate financial and human resources to operate and lead by example in eliminating political interference from within its own ranks; • Ensure that the appointment, promotion, and dismissal of all civil servants is based on merit rather than political considerations or personal connections; and • Ensure that appointment procedures and outcomes must be fully transparent and civil servants’ salaries and benefits are be based on a uniform, transparent and adequate salary structure.
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5. Conclusions and Recommendations The almost three decades of conflict in Somalia has shattered every institutional foundation especially the human capital. Consequently, today the scanty presence of competent and devoted personnel for key positions in the public sector has undermined the progress towards development and prosperity. Poor management, deficiency in transparency and accountability of integrity institutions combined with confusing policies have hindered coordination among government agencies.
This Financial Integrity Institutional Assessment analysis provides a broad based review of Somalia’s Financial integrity system within the country’s socio-economic context. The strengths and weaknesses of the country’s financial integrity institutions, it is governance structure, transparency and accountability frameworks in some detail. Despite security concerns, a lack of data, difficulties in accessing information, and other challenging circumstances in the country, the research team has made every effort to collect a wide range of data and present the results in an objective and open manner.
The assessment reveals overall weaknesses of the Somali Integrity System, operating with inadequate legal framework (see Annex 1 and 2). The institutions have weak structure, poor governance, inadequate capacity, resources and lack transparency and accountability. They are mostly operating on interim legal basis pending the establishment of constitutionally based legal framework. As such, this causes a huge gap between the legal mandates and practices, which affects the efficiency, integrity and transparency of the public sector operations.
With the establishment of the Federal Government Provisional Constitution in 2012, a flood of new laws were drafted as part of rebuilding integrity institutions, modernizing the financial system and initiating public sector reforms. These included among others specific laws aimed at improving the public financial management system, including the Public Financial Management bill, the Audit bill, the Procurement Concessions, and Disposal of Public Assets bill, and Civil Service Reforms and laws attempting to address the fight on anti-corruption.
A host of new laws and regulations were also considered to combat corruption. Most of these Laws are still pending parliamentary approval and the institutions are operating at interim basis with inadequate legal framework. Various organizational adjustments are to be made in concert with these new laws that are to lead to the creation of new bodies to provide financial, procurement and other oversight mechanisms for integrity institutions. These bodies are to create and monitor rules of the game, conduct audits, and oversee the implementation of laws. Specifically, an institution to coordinate the different efforts in the area of public financial management and provide a comprehensive roadmap of reforms, guide policy and give clear future directions, is urgently required.
The best achievements were made with the introduction of an IT – based systems through which the PFM practices were made formal. This involved the adoption of the Somali Integrated Financial Management Information System (SIFMS) with it an integrated personnel and payroll system as the basis for paying all salaries. Its implementation led to calls for new budget laws which are currently being considered under the PFM Bill.
These results point clearly that rebuilding and strengthening institutions in any country is not an easy or simple affair, but a serious and long-term process. Despite substantial financial and policy support for rebuilding institutions since the establishment of the Federal Government, the record
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in this endeavor remain modest. This is not only true for post conflict country, such as Somalia, but also for all countries. The question remains, as to whether institutions are progressing towards greater reliability, responsiveness, integrity and fairness (for detail see Annex 1).
The key issue of achieving solid, effective and accountable financial integrity institutions depends not solely on political will and buy-in but on finding solutions that are specific to Somalia`s needs. Among the key issues hindering success to institutional building are:
• Weak government leadership and ownership of reform initiatives; • Technocratic solution not tailored to the Somali legal, administrative and cultural context ‘One size fits-all’; • Rigid project management approaches that do not allow room for adaptation to changing circumstances; • Lack of communicating as early as possible to the public the benefits and rationale for changes undermine credibility and lead to poor implementation; and • Changes to legal procedures will have to be assessed and implemented, and structures should be put in place to coordinate implementation among the different levels of the institutions, with care taken to receive and act on ongoing feedback through the implementation process.
On the practical side Somalia has been implementing reforms in several areas in the past few years but the results have been modest. The impacts have been of limited mix, improvement in some areas, such as better-informed financial statements, budget formulation and execution processes, faster external audit, have had a limited or no impact on controlling the fiscal situations or reducing huge volume of off-budget spending. The implementation of SFMIS has not significantly increased the timeliness of financial data, the processing of payments or more reliable control of cash flows and improve the process of budget formulation.
Looking ahead, the FGS is still trying to process the PFM Bill, which has been pending parliamentary approval to enact the Public Financial Management Law. This legislation is considered crucial in reforming the Public financial sector and expected to offer the possibility of remedying most of the deficiency in the Somali PFM system, where the country is lagging behind most of the neighboring countries in the region. In this case it is recommended that top priority be given in the short and medium term to the following:
• Enhancing Budget Transparency: there is a scope to open the wider public to build trust and budget credibility and create a mechanism of access or entry points to key stakeholders, such as NGOs, private sector, academic and interest groups to engage actively in the budget preparation process. This could be accomplished through a formal consultation, such a public forum on sector investment or policy proposals (sector working groups), etc. Similar approach could be used to involve citizens to monitor the execution of key public services; • Establishing Macroeconomic and Fiscal Forecasting working group – Under the PFM Act Somalia could make legally binding the government to prepare and present macroeconomic and fiscal forecasts to the Budget and Finance Committee of the Parliament. The macroeconomic and forecast group is to present and explain in details all economic assumptions underlying the forecasts. In addition, the Ministry of Finance will have to present forward estimates of revenue and expenditure in detail to the parliament. • Establish Fiscal Council – Consider establishing an independent fiscal council (or technical committee) empowered with the responsibility of assessing government
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financial plans and fiscal targets. Validate macroeconomic and fiscal forecasting assumptions that feed into the budget. • Auditor General – due to observed endemic corruption in the public sector, the role of auditor general must be strengthened to respond to the increasing demands from the citizens on the way public resources are mobilized, allocated through the budget and disbursed. These and other transparency and accountability procedures are described in detail in the Auditor General Act. This could strengthen the Auditor General Office by establishing penalties and other measures for all institutions that violated or refuse access to information to the Auditor General required for the audit. • Strengthen Procurement Process – implement competitive tender process open and transparent to all costumers based on the Procurement Act. • Civil Service Commission – strengthening the legal framework for the NCSC to operate independently and change the clan-based recruitment to a merit base system. Create an environment of attractive remuneration and providing sustained training to develop full capacity of the service. • Central Bank - strengthen the capacity of the Bank to operate as the government’s banker and advisor, act as a regulator and supervision of banks and financial institutions. Build the CBS capacity to implement national monetary policy and managing country’s external position.
This analysis offers key points of entry for the reform agenda to be set both in the short and long term. It must be made clear at this stage that this paper intends to contribute to the institutional reform discussion that obviously is ongoing in Somalia and reflected in the recent initiatives by the NEC/NEA. On the face of it, the analysis might appear overly critical on the ongoing reforms. This standpoint will be unfortunate, given that the narrative should not be read as overly negative but instead be considered as both commentary of what worked and what didn’t and the next challenges the country is facing. The fact that past reforms had limited impact shows that to make change happen in a more tangible way, the next steps of Somalia’s reform agenda should be fortified and enhanced. Finally, the Somali authority should take stock of what has been achieved, recognize the limitations in result and seek a new and ambitious reform program.
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Annex 1: Limits and Gaps in the Somali’s Integrity Institutions Anticorruption Public Financial Procurement OAG Revenue & Tax CBS BFC NCSC
Management Administration
Corruption considered Broad reform Procurement Legal framework not A Department within Most of the Laws are in Operational but not with Most Laws are still being extremely high and programs developed laws being yet fully defined the MoF, place but implementation clear and focused prepared or pending in
AL AL pervasive. formulated very weak responsibility parliament Laws, formal processes Operating partially Collect tax only in Little in place, legislations lacking, no compliance Operating at with no clear Banadir region only CBC is functional but not Mandated for external Political interference in are in the development with PEFA Interim basis, functions and fully as defined by the scrutiny of the PFM, the recruitment
TITUTION process most of its work coordination Tax collection still Laws oversight and external dominate the process Actual Implementation is done by FGC. structure with other below 3% of GDP scrutiny of the budget Constitutional Commission weak and poorly agencies and monitoring public Control system lacking on Anticorruption approved coordinating Capacity, Capacity limited both Capacity both at resources and by the Parliament and transparency at managerial and managerial, technical expenditure, Recruitment process not proceeding through legal EVELOPMENTS procedures Budget preparation limited technical levels levels is limited merit based D with no policy and Capacity to operate as macroeconomic Some Independence not clear an oversight institution framework procurement from its operational not in place
URRENT LIMITS IN INS IN LIMITS URRENT spending’s are works
C Transparency not yet subject to open Poorly resourced developed bidding (through FGC) SFMIS is operation & successful but lack coordination Significant gap observed Gap between planned Gap b/w laws and OAG is functional and FGS revenue ok too Weak capacity Gap b/t the mandate Gap between CSC laws between government set reforms and capacity to conducts numerous low, less than 3% of undermines the and the capacity to and actual MS MS goals and practical implementation is to implement laws is audits and analysis GDP with this the independence, implement implementation huge
implementation wide far from reality but does not take any government intends disproportional legal action against to finance 55% of the No monetary policy Limited capacity and Corruption has been on Gap between Use of interim those institutions 2019 budget. framework is in place Gap in institutional inadequate resources the rise and little is done transparency in institution to i that violate the laws capacity and needed undermine the ability to in practice to curb. formulation and undermine long 45% of the budget to Gap in adopted resource immense implement policies and execution too broad term capacity Gap between the be financed from international standards strategies. building laws and capacity to donor finding donors and code to improve AGAINST GOALS AGAINST SFMIS has made little implement the laws system of transparency contribution to and accountability APS IN PLANNED REFOR PLANNED IN APS improve transparency G and budgeting
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Annex 2: Status of Financial Integrity Institutions
Policy and strategy Baseline Recommended Responsible Output Challenges Timeframe action institution Anti – corruption Little is in place the Speed the process of The executive: Office of Establishment of anti- Be Independent and Immediate Commission approved redrafting and finalizing the President/Office the corruption commission autonomous form all The 2015 approved Anti- the bill through Prime Minister the other arms of Corruption Commission parliament process for government was never made discussion and approval operational and the allegations of corruption in the public sector remained uninvestigated. Anti - corruption Not much in place Develop anti-corruption Government and all the Comprehensive, Avoid imposed and strategy strategy that is locally stakeholders country owned and donor driven owned, comprehensive implementable strategy strategy Public Financial Operational Plan for • Avoid piecemeal MoF and stakeholders Implemented Avoid putting in Management policy reforms in place but implementation Comprehensive and place temporary and strategy poor and slow approach, and systematic reforms institutions and implementation and • Implement country measures that hinder donor driven owned reforms establishing and developing appropriate institutional capacity PFM Bill Draft Bill developed in Speedup the Mof & Parliament and Bill Approved Parliament Delay 2011 still pending in processing of the Bill stakeholders processing due poor parliament through parliament clarity and commitment from the MoF Auditor General Office Legal framework is not Revise and update the Executive Approved Bill and the Linkage between the yet in place and even Bill and put through the AGO to have a legal PFM Bill and AG Bill though the Bill was Parliament process for framework to operate need to be passed by the approval established and Parliament was not coordinated signed by the President in 2016. The bill has been
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Policy and strategy Baseline Recommended Responsible Output Challenges Timeframe action institution returned to the Parliament for consideration Procurement Legal frameworks to Put in place appropriate MoF Approved Legal Avoid establishing ad regulate public framework for public framework by the hoc temporary procurement are weak procurement and parliament institutions and few mechanisms ensure transparency are in place to ensure transparency in the sector Financial System (CBS) legal framework for the • Address capacity CBS • Improved capacity The financial sector Financial sector is place; issues, • Established & institutions in there is: • completed needed centralized interbank Somalia are in a) absence of legal & regulatory payment disarray with few centralized and inter- issues • Monetary policy qualified staff. bank payment systems; Adopt international • • National payment Commercial banks (b) shortcomings in the standards and codes system (AML/CFT) frame work; & systems for and money transfer and (c) a still-weak CBS transparency & institutions have capacity accountability slowly been building their capacities.
Parliamentary Budget A very weak institution • Discuss and make Parliament • Address issues Weak working and Finance Committee that is not able to recommendations on related to corruption relation b/w the AGO perform according in bills laid before the and accountability; and the BFC accordance with its Parliament; • contribute to poor mandate. • Initiate any bill within performance of both their respective area institutions of competence; • Assess and evaluate performances of the Executive and other government bodies; and Financial Governance The FGC an • Continue assisting on MoF • Contracts reviewed The challenge is the Committee arrangement made procurement and awarded FGC should not between the FGS, • Advice on financial according to the replace government donors & (IFIs) to issues rules;
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Policy and strategy Baseline Recommended Responsible Output Challenges Timeframe action institution provide a forum for • Fiscal Federalism • Facilitated policy institutions, such as dialogue and advice on dialogue b/w donor Interim Procurement strategic financial and government board and other that governance issues. Its part of integrity role was expanded to institutions of the include procurement and control FGS Special Financing The SFF provided rapid • Build more MoF • Country system work All development Facility funding in support of transparency and partners agree to use the Government to accountability in the country system and make regular payment country system some are providing of civil service salaries • Promote utilization of they funding through and direct government county system; and the budget and on delivery of • Encourage donor to development projects use the country treasury (WB, AfDB, of value to local system. EU). communities. Revenue and Tax Total FGS tax revenue • Modernizing revenue Revenue Department; • Autonomous revenue Administration remained just over 2.7 institutions; MoF authorities; percent of GDP in 2017. • Strengthening, • Improved capacity of FGS revenue covers consolidating, and tax and customs only portion of the harmonizing the administration. small federal system. • Revenue government budget a • Crafting and passing administration little over 50%, and needed legislation; operating efficiently more than 80 percent • Reducing loopholes, of tax revenue comes removing from trade taxes. exemptions, and The system’s introducing strict weaknesses reflect control through the poor policy, weak Accountant General administrative capacity, and other institutions and inadequate to reduce coordination of mismanagement and institutions at all levels corruption; of governments and • Consider outsourcing between the federal revenue government and its administration
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Policy and strategy Baseline Recommended Responsible Output Challenges Timeframe action institution Federal Member States (FMS) Integrity in Civil NCSC established by • Promote integrity Civil service Independent CSC • Budget Services Commission the Law of 2006 within the CSC, Commission and operating from political Limitations; free from political Ministry of labor interferences • Non-Conducive Ineffective control influence Physical Working Merit base recruitment • Executes Civil Environment as Weak institutional Service-related the Commission capacity and huge policies and operates from a political interference by the executive legislation; small space; • Guarantees the • Internal Capacity independence of Constraints caused the CSC from in part by limited political staff in the NCSC; interference
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6. References
Transparency International (2017): Corruption Perception Index https://www.transparency.org/news/feature/corruption_perceptions_index_2017
Afdb (2017): Economic and Financial Governance Institutional Support Project (EFGISP) Phase https://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and- Operations/Somalia_- _Economic_and_Financial_Governance_Institutional_Support_Project__EFGISP__Phase_II _-_Approved.pdf
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AfDB (2017). BANK GROUP COUNTRY BRIEF 2017-2020 https://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Somalia- Country_Brief_2017-2020.pdf
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Mo Ibrahim Foundation (2018): BOLSTERING GOOD GOVERNANCE: The imperative of inclusion and efficiency https://www.brookings.edu/wp- content/uploads/2019/01/BLS18234_BRO_book_006.1_CH1.pdf
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mni&p2=%5ECPC%5Echr999%5ETTAB02%5E&ptb=18D3188E-6811-4E87-8F37- 3426FE3A3CFA&n=783aaf00&si=
Ministry of Finance (2018): Financial Governance Report https://somaliampf.net/files/Financial_Governance_Report_(English).pdf https://www.imf.org/~/media/Files/Countries/ResRep/SOM/English/SOM-FGC-March- 2017.ashx
HESPI (2017): Final Report on the Assessment of Financial Institutions HESPI (2017) Final Report on Somalia Financial Integrity Dec 13 2017a.pdf https://www.academia.edu/36020379/Final_Report_on_Somalia_Financia_Integrity_Dec_13 _2017a.pdf
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Government of Federal Republic of Somalia (2006): The Law of the Somali Civil Servants http://workspace.unpan.org/sites/internet/documents/unpan039443.pdf#
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