REQUEST FOR EXPRESSIONS OF INTEREST AFRICAN DEVELOPMENT BANK REGIONAL DEVELOPMENT AND BUSINESS DELIVERY OFFICE, EAST AFRICA (RDGE) Khushee Tower, Longonot Road, Upper Hill P. O. Box 4861 - 00200, Nairobi, Kenya.el: (+254-20) 2998352 Fax: (+254-20) 271 2938 Website: www.afdb.org; E-mail: [email protected] and [email protected]. Brief Description of the assignment; DEVELOPING A COMPETITIVE FINANCIALSECTOR TO DRIVE THE ECONOMY POST COVID-19 IN SOMALIA Place of assignment: Mogadishu, Somalia and partly virtual Period of assignment: November 2020 – May 2021 Expected start date of the assignment: November 2020 Last date for expressing interest: 16th October 2020 Expression of interest to be submitted to: [email protected] and copy [email protected] Any questions/ clarifications needed to be addressed to: [email protected] and [email protected]. Further details are as below. TERMS OF REFERENCE DEVELOPING A COMPETITIVE FINANCIAL SECTOR TO DRIVE THE ECONOMY POST COVID-19 IN SOMALIA GENERAL INFORMATION Services/Work Description: Conduct a diagnostic study to inform reforms to strengthen the Central Bank’s regulatory framework, supervisory capacity, and modernization of the payment systems. Type of the Contract: Individual Consultants Expected Duration: Six (6) person months: November 2020 – May 2021 Expected Start Date: November 2020 I. Background Update on recent economic developments Somalia remains trapped in a low and volatile growth situation resulting in pervasive poverty. Growth averaged 2.7% during 2015-2019, which is lower than the average growth in population of 2.9%. Private consumption, which accounts for about two thirds of GDP is the leading growth driver on the demand side but boosting capital investments is necessary to lift growth, reduce poverty and support economic diversification. During the 2016-2019 period, government expenditure averaged less than 6% of GDP, while net exports were about -62%, with gross investments accounting for about 14% of GDP, which is not enough to cover the country’s significant reconstruction needs. The Central Bank of Somalia (CBS) has limited control over the exchange rate and the supply of the Somali Shilling as printing of counterfeit notes by private actors is very common. Consequently, Somalia’s de facto currency is the USD, which is used for most transactions including mobile money payments. Inflation receded to 5.1% and 4.4% in 2018 and 2019 respectively following improved food supply. Despite the expected fall in aggregate demand due to reduced economic activity, inflation is projected to spike to 6.3% in 2020 in the worse-case scenario, compared to the pre-COVID-19 projection of 3% due to supply shortages following contraction of imports. Implementation of the HIPC completion point reforms requires zero-cash fiscal balances to avoid payments arrears and debt accumulation. To achieve this, while responding to the COVID-19 impact, the international community has pledged to support Somalia such that any revenue losses due to COVID- 19 will be fully offset and additional resources to shield the vulnerable population from the effects of the pandemic will be provided to finance an expanded social protection program. The mid-year fiscal report points to less than targeted customs and sales taxes by end of 2020 and this is happening at a time when increased spending on health care programs and transfer to Federal member States (FMS) and Benadir Regional Administration (BRA) are putting more fiscal pressure on the Government. Somalia’s external balance position reflects an unsustainable structural challenge of an undiversified economy that is vulnerable to internal and external shocks. The current account deficit stood US$409 million in 2019 (8% of GDP), mainly financed by remittance from diaspora and FDI. Exports of livestock, which accounted for 57% of total exports in 2013 have declined to about 27% in 2018 due to the 2017 ban by Saudi Arabia, the country’s largest export for livestock. Somalia’s public debt declined to 55% of GDP following the clearance of its arrears with the Bank, World Bank and the IMF and interim debt relief from the Paris Club creditors in March 2020. However, the country remains in debt distress as its 55% debt to GDP ratio is above the sustainable 30% threshold for low-income countries. Somalia has since embarked on implementing an IMF Extended Credit Facility program that is expected to lead to full debt relief by 2023/24, subject to satisfactory performance. The economic outlook is overshadowed by the COVID-19 crisis despite reengagement with the international financial institutions (IFIs). Somalia health systems are weak, containment measures have reduced consumer demand and investor sentiment has turned negative due to the uncertainty related to the pandemic, while disruptions in global supply chains are constraining supply. Preliminary projections indicate that real GDP growth will contract by 3.3% under the baseline scenario where COVID-19 is contained by the third quarter of 2020 and by 5.4% under the worse-case scenario if COVID-19 persists to the end of 2020. A partial rebound to 1.1% and 0.3% is expected under the baseline and worst-case scenarios respectively in 2021. The Consumer Price Index (CPI) on food and non-alcoholic beverages peaked at 132.03 in May but has since declined to 125.6 in July 2020, suggesting a positive response to government’s targeted and temporary tax relief on essential food imports from April to July 2020 and this has been extended by another three months. Update on the Financial Sector Somalia’s financial sector is nascent, and intermediation is limited. Total sector assets are equivalent to about 5.4% of GDP; credit to the private sector is about 2.3% of GDP, although growth has been rapid over the past two years. Banks provide a mix of Islamic and conventional financial products. Demand for credit is primarily generated to pay for imports, followed by real estate and from households. The coverage of conventional banking services is limited to urban areas given the fragile security situation, constraining access to financial services for the sizable rural and nomadic population. At the same time, widespread use of mobile money (MM), which is estimated to have a penetration rate of 73%, and remittance inflows (over 20% of GDP), represent opportunities to increase inclusivity and broaden access to financial services. The use of MM to conduct cross-border transfers is growing and many Somalis hold balances in MM and with money transfer businesses (MTBs), in addition to traditional savings in banks. The sector faces numerous constraints to greater financial stability and intermediation. There are considerable trust and information deficits. Financial institutions, including the Central Bank of Somalia (CBS), require additional capacity and improved governance, and the financial infrastructure (credit information, judicial, legal) is under-developed or non-existent. Individuals and businesses report that the main obstacles to accessing credit are unfavorable terms and conditions, and insufficient collateral. At the same time, risk aversion constrains bank lending, illustrated by a highly liquid system and the need for financial infrastructure. The payments system is under-developed: MM penetration is high but lacks inter-operability; settlement and clearance of inter-bank transactions at the CBS lacks scalability; and, international payments are largely transacted through MTBs that have lost or face the risk of losing correspondent banking relationships due to de-risking by international correspondent banks. These gaps inhibit efficient financial intermediation and robust economic growth. The impact of Covid-19 to the banking sector is at an early stage as the first stage of lockdowns was announced in the third week of March 2020. In this regard, Q1 report of 2020 does not show any noticeable change in the credit to private sector and customer deposits. The nonperforming loans (NPL) is almost similar to the last quarter of 2019. COVID lockdown and travel restrictions have impacted mobile transfer business and almost depleted the cash-flow, constraining their ability to make payments as suspension of international and domestic flights affected the movement of cash into Somalia. Despite the underlying challenges on correspondent banking from banks, there is an indication that some businesses are shifting their fund transfer to the banking sector. The biggest obstacle to using this secure and traceable medium of payment, is the fact that remittances are logistically blocked in North America and Europe. II Objective of the assignment: The objective of the assignment is to support the Government of Somalia to generate rigorous analytical work to inform required financial sector development reforms, with emphasis on enhancing the central bank’s capacity to regulate and ensure focused financial sector contribution to post-COVID-19 economic recovery. III. Scope of Work The African Development is seeking to recruit a team of consultants to support the Government of Somalia notably the Central Bank to undertake a financial sector diagnostic study to assess the impact of COVID-19. This study will identify gaps and develop a road map for establishing a competitive financial sector to increase access to credit for the private sector, notably business affected by the COVID-19 crisis. During the assessment, the team of experts will work with the Government officials and Central Bank team to address some of the weakness identified