ReportNo. 6542-SO Somalia Public Disclosure Authorized RecentEconomic Developments and Medium-TermProspects February10, 1987 Country ProgramsII Easternand SouthernAfrica Region FOR OFFICIALUSE ONLY Public Disclosure Authorized U Public Disclosure Authorized Public Disclosure Authorized Dmiuf. eW_ ] MUMaA_M-ay btured tecipients a"un. ks contemay n otherwise CURRENCY EQUIVALENT Currency Unit = Somali Shilling (So. Sh.) = 100 cents ABBREVIATIONS ADC - Agricultural Development Corporation AMF - Arab Monetary Fund ASAP - Agricultural Sector Adjustment Program CPE - Centrally Planned Economics CPI - (Mogadishu)Consumer Price Index CSD - Central Statistical Department DAC - Development Assistance Committee DOD - Debt Outstanding and Disbursed ECA - UN Economic Commission for Africa ENC - The National Commercial Agency HASA - Hides and Skins Agency MNP - Ministry of National Planning MOF - Ministry of Finance OECD - Organization for Economic Corporation and Development OPEC - Organization for Petroleum Exporting Countries NBB - National Banana Board ONAT - Farm Machinery and Agricultural Services Corporation PIP - Public Investment Program TYDP - Three-Year Development Plan (1979-1981) UNHCR - United Nations High Commission for Refugees GOVERNMENT OF SOMALIA FISCAL YEAR January 1 - December 31 FOR OMCIL US ONLY This reportis based largelyon the findingsof an economic missionwhich visitedSomalia during June-July 1986. The missioncomprised Messrs. SwadeshBose (MissionChief), Jack van Holst Pellekaan (agriculture),George Beier (publicinvestments), Ashok Khanna (industry), AlbertoAgbonyitor (micro-economics), Thorveld Moe (externaldebt, consultant), and Ms. Seema Hafeez (publicfinance, consultant). Swadesh Bose is the principalauthor of this report. The draft reportwas discussedwith the Somaliauthorities by Messrs Bose and Beier in January 1987. --------------------------------------------------------------- __--------- Thisdocument has a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. SOLIAt RECENTECONOMIC DEVKLOPMHNTS AND MEDIW-TERM PROSPECTS Table of Contents Pate No. COURY DATA (i-iii) EECUTIE S ARY (iv-ix) CHAPTERI Introduction 1 Scope of Report 1 Background 2 An Overview 4 CHAPTERII RecentEconomic Developments 6 ProductionGrowth 6 DomesticInvestment and its Distributionby Sector 9 Macro-EconomicImbalances 10 Balanceof Payments 13 ExternalDebt 16 Fiscal and MonetaryDevelopments 21 Key Performanceand IncentiveIndicators 26 CHAPTERIII Progressof PolicyReform and RemainingIssues 30 A. Liberalizationand Incentivesto Promote 31 Production B. ExchangeRate Regime 36 Background 36 Evolutionof ExchangeRates 37 Operationof the Free ForeignExchange Market 39 Effectsof the ExchangeRate System 40 C. FiscalPolicy and PublicExpenditure Program 41 PublicSector Resource Mobilization 42 CommodiryAid Utilizationfor the Budget 44 PublicExpenditures 46 PublicSector Salaries 50 D. Summarvand Recommendations 50 CHAPTERIV Medium-TermProspects 54 Constraints 54 GrowthProspects 55 Balanceof PaymentsProspects 57 Debt Relief 61 GovernmentBudget Prospects 67 STATISTICALAMN=E 71 SOMALIACOUNTRY DATA Economic Indicators ONPPer Capita n US3281(19865)1 Annual Rate of Growth of GDP at Constant Factor Cost (t) GrossDomestic Product in 19865 (FiscalYears) US$ Min X 1980-83 1984 1985 CDP at MarketPrIces 1516.0 136.0 4.6 3.6 8.3 Investment 232.1 15.3 ResourceBalance -275.5 18.2 Export of Goodsand NFS 14096 9.8 Importof Goodsand NFS 416.1 27.4 OutputIn FY 1985 ValueAdded (FactorCost) Agriculture 829.1 67.6 Industry 127.2 8.8 Services 482.7 38.6 1439.9 lW-. CENTRALGOVERNMENT FINANCE 1980 1981 1982 1988 1984 1986 ti l l l1t o n So. Sh) TotalRevenue 1421 2268 2769 4263 8979 5220 CurrontExpenditure 1892 2295 2906 4716 8140 9918 CurrentSurplus or Deficit(-) -861 -32 -146 -463 -4161 -4898 Investment Expenditures la8 1426 2481 1920 3182 7949 Overall Deficit -1711 1467 2689 2_83 7343 12638 l/Exchangerate used for conversioninto US dolarsis 1US$ = 63.6 So. Sh. This exchangerate is derivedby assigning50 percentweight to the officialexchange rate and 50 percentweight to the averageof the commercialand free market rates. BALANCEOF PAYMENTS 1960 1901 1932 t 1914 1901 MerchandisoExports (f.o.b) 134 114 157 101 62 9J MerchandiseImports (c.l.f.) -461 -422 -434 -41U -496 -362 Trade Balance -W1-ai 7 -J49 -5M N1 Non-factor service -6 9 23 24 -3 - Interest Paymwnt. -2 -10 -14 -21 -44 -43 Private transfers, not 57 64 go 51 72 29 CurrentAccount Balance -271 !i5 -2Wf -2WC -ST -2W1 OfficialLoans, Not 143 16S 157 140 174 179 OtherCapita 37 79 123 1in 46 69 (Incl.rrors A omissions 21 3 -36 -39 -46 -36 OverallBalance -27 -13 -44 -86 -139 so RATEOF EXCHANGE W1101l Rate From1973 to June39, 1901- US81.0* So. Sh.6.295 July1, 1981-Juno3J, 1982- A dualexchange rate with: USS1.11a 6.295(for essential lmports) USJ1.49a 12.59(all other foreign transoctleas) July-l, 1902-Oct.22, 1983 -- USJ1.00a So. Sh. 15.227 Oct.23, 198W-Sept.14, 1914- USSn.OOa So. Sh. 17.55 Sept.15, 1094-Doc. 31, 1984 - USS1.40 So. Sh 26.00 Jan. 1, 1986-Feb. 28, 1905- USS1.00a So. $h. 36.09 OfficialRate Free MarketRate 1985 March 37.0 91.4 June 40.6 97.8 Sept. 40.6 100.7 Dec. 42.5 114.7 1986 Jan. 64.5 114.8 March 82.5 138.6 June 74.5 152.3 sept. 86.6 134.0 Dec. 90.5 132.0 - iii. MONEY.CREDIT AND PRICES Doe. Doc. Doe. Doc. D1c. Doe 1960 19 1902 19118 1964 165 (MillionSo. Sh) Bank Claim,on Government(net) 1,982 2,260 2,199 1,805 4,378 6,252 Bank Claim on PrivatoSector 426 675 1624 2298 8727 4024 Bank Claimson PublicEnter. 1651 1722 1890 1168 1511 2671 Mon.ySupply (MI) 2,768 8,619 $,911 4,167 6,676 9,117 (IndexNumbers) ConsumerPrice Index (1977=199)218.7 818.4 848.2 624.0 1996.6 1867.9 AnnualPercontage Change ConsumerPrice Index 69.0 44.6 22.6 36.4 92.1 37.9 Bank Clalm on PrivateSector -4.7 85.0 102.4 41.2 62.5 6.9 BankClaim on PublicEnter. 21.8 11.9 -24.6 -19.6 29.9 87.1 MoneySupply (MI). 19.2 80.9 0.1 8.8 22.2 79.5 MECHANDISEEXPORTS Av*rcog 199-62 1968 1984 1986 USSIMIn _ USS Min _ US SMln X USS Min X Livestock 1M1.$ 79.8 72.0 71.5 83.1 5$.4 66.9 71.4 Bananso 9.4 7.3 15.9 14.9 14.1 22.7 1 J. 14.1 Met &MtA Products 9.6 9.4 9.2 9.1 - - - - Hides and Skins 6.2 4.0 1.5 1.5 8.9 6.8 4.8 4.6 FishA Flh Products 1.8 1.9 2.8 2.8 0.4 0.6 0.2 0.2 Others 10.2 6.9 9.7 9.7 19.5 17.0 9.0 9.7 TOTAL 1HEl. 19.-.7 199 . 62. 9i51 liU. EXTERNALDEBT US$ Min. Public Dobt (Doc.31,1989) 1542.7 DEBTSERVICE RATIO (1965) X Accrualbasis 104.0 Cash basis 48.9 IDA LENDING(DEC. 31. 1986) Outstanding and Disbursed 215.23 Undisbur.ed 47.94 Outstaning Inc. Undisbursed 268.17 - jv_ EXECUTIVESUMMARY INTRODUCTION 1. Somaliais among the least developedcountries of the world. Endowedwith ratherlimited known naturalresources and a fragile environmentfor agriculture,it faces formidableconstraints to economic developmentin the face of a 3 percentannual growth of population. Livestockproduction accounts for nearly40 percentof GDP and 80 percent of exports,but cannotincrease rapidly since the capacityof the rangeland has nearlybeen reached. A rapid growthof crop productionwhich accounts for about 12 percentof GDP will requireinvestments in irrigation rehabilitationand development,as well as in other infrastructure, researchand extension. Developmentof the tiny industrialsector is constrained,among other things,by a scarcityof skills. Somalia's economicdevelopment is a challengingtask requiringsound policies. On the contrary,pervasive Government controls led to grosslyinefficient resourceuse and hinderedgrowth in the 1970s;and for a numberof years Somaliahas been sufferingfrom seriousdomestic and externalfinancial imbalances,rapid inflationand debt servicecrisis. Since the first ConsultativeGroup meeting in 1983,the Governmentwith the supportof the donor communityembarked on a programof policyreform to achievethe twin objectivesof financialstabilization, and economicadjustment and growth throughfostering greater market orientation. Recent EconomicPerformance 2. Real GDP growthin 1984 and 1985 was between3 and 6 percentper year originatingmainly from livestockand crops. The reformprogram involvingtrade liberalization,exchange rate reform,and dismantlingof agricul-uralprices and marketingcontrols, with favorableweather, led to the recoveryof productionand exports. For two consecutiveyears, productionof crops particularlyfoodgrains has increasedremarkably. Maize productionincreased from 235,000tons in 1983 to over 380,000tons in 1985 (Table2.2). Export earningsincreased from $62 million in 1984 to $93 millionin 1985 as the searchfor new marketsfor livestockbegan to yield results. Real economicgrowth was accompaniedby a modest declinein importsfrom $406 millionin 1984 to $362 million in 1985 as increased domesticproduction led to reducedfood imports. Domesticinflation declinedfrom 92 percentin 1984 to about 37 percentin 1985 and 1986. Therewas a marginalreduction in the currentaccount deficit on the balanceof paymentsdue considerablyto about $150 milliondebt relief obtainedin 1985. Still new paymen-tsarrears were accumulatedin 1985 which added up to total arrearsof $173 million. There was modest improvementof the budget deficitas domesticrevenue made some recovery. Implementationof PolicyReforms 3. After the relapsein 1984, implementationof policyreform improvedin 1985 and has continuedthrough 1986. Pricingand marketingof most agriculturalgoods have been liberalized,major price controlshave been dismantled. Most of the controlson exportand importtrade have