Policies Towards Foreign Direct Investment

The Federal Government of Somalia (FGS) at the federal and regional level has a positive attitude towards foreign direct investment (FDI). However, insecurity driven by terrorist groups, lack of transparency, and widespread corruption in sectors of government make Somalia present considerable barriers to foreign direct investment at the moment.

The country passed an Investment Law in 2015 on the promotion and protection of foreign investments. According to the Somali Chamber of Commerce and Industry, the law aims to offer favorable incentives to foreign investors, such as tax advantages and guarantees against expropriations. Under the law, priority is given to foreign investments in the areas of agriculture, livestock, fishing, mineral resources, and industrial activities.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no laws in place currently that deal with the right to private ownership and limits on foreign control.

Other Investment Policy Reviews

There has not been a third-party investment review undertaken in Somalia.

The FGS is not a member of World Trade Organization (WTO) or the Organization for Economic Cooperation and Development. In August 2017, Somalia communicated its intent to join the WTO and in May 2020 after working through the accession stages, Somalia submitted its Memorandum on the Foreign Trade Regime.

The FGS rejoined the Common Market for Eastern and Southern Africa(COMESA) community in July 2018. As a member, Somalia is required to undertake several institutional, policy, and regulatory reforms to meet COMESA free trade protocols and to trade with its member countries.

The FGS has also applied for East African Community (EAC) membership and is now awaiting the submission of the verification report by the EAC Secretariat before the next Heads of State Summit, scheduled in early 2020, for a decision. It is highly likely the EAC will approve Somalia to be the seventh member, and this will open up the opportunity for Somalia to formalize trade with its neighbors and allow easy movement of Somali citizens to other EAC member states through acquisition of the common EAC passport.

Somalia has also indicated its support for and intention to participate in negotiations on the African Continent Free Trade Agreement.

Business Facilitation

In 2019 Ministry of Commerce and Industry launched a “one-stop shop” business registration website. The aim of the portal is to reduce time and costs for registering a business in Somalia. However, due to some technical hitches, the online registration website was never operationalized. The World Bank is currently providing technical support to the ministry to operationalize the site. In 2019, both houses of the parliament passed legislation formalizing the legal requirements for company formation and registration and the President Mohamed Abdullahi Mohamed “Farmaajo” signed the legislation in to law.

The World Bank ranked Somalia 190 out of 190 in its 2019 Ease of Doing Business survey.

Outward Investment

The Somali government does not have a policy that promotes or incentivizes outward investment.

Somalia’s limited business laws do not cover outward investment by companies registered in Somalia.

Transparency of the Regulatory System

Somalia’s regulatory system is largely nonexistent. The country’s 2012 provisional constitution is currently under review. Many of the current investment regulations are outdated, having been developed by the central government before 1991. The current FGS has revised some of these regulations and has begun development of modern business and investment legislation to conform to the global business environment. Some new pieces of legislation recently approved and signed into law include: telecommunication, petroleum, company, public finance management, and anti-corruption laws. Several more business-related laws are currently under review.

International Regulatory Considerations

Somalia is a member of Inter-Governmental Authority on Development (IGAD) and in 2018 obtained provisional membership in the Common Market for Eastern and Southern Africa (COMESA) with a number of conditions to fulfill before resuming full membership. Somalia is a member of Arab League and Organization of Islamic Cooperation (OIC). Somalia is not yet a member of the World Trade Organization (WTO).

Legal System and Judicial Independence

Somalia’s legal system derives from four sources, including the Italian and British legal systems, customary dispute resolution (xeer) principles, and Islamic law. The majority of citizens rely primarily on xeer, Sharia courts and local imams, or private mediators to resolve disputes. The provisional constitution establishes a judiciary system that is independent of the executive and the legislature, however, the necessary laws to operationalize this structure are not in place and the legal system revolves around the executive. Somalia’s legal system is based in Islamic law, which includes mechanisms for addressing commercial disputes. However, due to the prolonged absence of a functioning central government and judicial system, businesses and individuals often resort to Somali customary law. This informal system provides a framework for settling disputes, including business disputes, through clan and religious leaders. In some instances, Mogadishu residents seek intervention from al-Shabaab’s “courts” to resolve disputes, particularly when one of the disputing parties is from a minority community that lacks confidence in other dispute resolution mechanisms, including Somali customary law.

Laws and Regulations on Foreign Direct Investment

While Somalia’s 2018 Investment Law provides some guidance for foreign investors, there are no laws or regulations related specifically to foreign direct investment. The Ministry for Commerce and Industry is working on the development of FDI laws. In 2019 the Ministry of Planning opened its Investment Promotion Office(SomInvest ), to provide potential investors with guidance on working in Somalia. Sominvest has already provided guidance and assistance to U.S. companies looking to register business entities in Somalia. (http://sominvest.mop.gov.so/ )

Competition and Anti-Trust Laws

Competition and Anti-Trust laws do not exist in Somalia. Local business disputes are informally settled through the intervention of traditional elders.

Expropriation and Compensation

Somalia is still rebuilding from decades of lawlessness and the legal and regulatory environment is undeveloped. There are no laws or acts that define how government or authorities can expropriate private properties. However, the provisional constitution states, “The state may compulsorily acquire property only if doing so is in the public interest. Any person whose property has been acquired in the name of the public interest has the right to just compensation from the State as agreed by the parties or decided by a court.” Many government-owned properties ended up in private hands illegally after the 1991 collapse of the central government and the current government has now indicated an interest in repossessing these properties.

Dispute Settlement

ICSID Convention and New York Convention

Somalia is not a party to the convention on the settlement of investment disputes between States and Nationals of other States, known as the International Centre for Settlement of Investment Disputes (ICSID), or the New York Convention of 1958.

Investor-State Dispute Settlement

The government has limited capacity to enforce laws or settle disputes domestically. Many businesses in Somalia are owned by members returning from the diaspora, though they operate as Somali businesses rather than foreign entities. Some of the basic laws that would provide the foundation for investor-state dispute settlement, such as the company law, are in the process of being implemented. Somalia is not a signatory to any internationally binding treaty or investment agreement to arbitrate investment disputes. The government has no bilateral investment treaty or free trade agreement with an investment chapter with United States. There have been no investment disputes involving U.S. persons or other foreign investors for the past 30 years.

International Commercial Arbitration and Foreign Courts

Somalia is not signatory to any convention on commercial arbitration and local courts have limited capacity to enforce dispute resolutions arbitrated by them. Domestically, people normally resort to a local council of elders and clan elder, or religious leader to settle disputes. Many foreign companies rely on arbitration courts in Djibouti or United Arab Emirates. The Intergovernmental Authority on Development (IGAD) is working on a regional initiative to establish a business dispute and arbitration center in Djibouti.

Bankruptcy Regulations

Somalia has no bankruptcy laws.

Investment Incentives

There are no formal investment incentives available to foreign investors and the government does not issue grants or jointly finance foreign direct investment projects. There are no laws or acts that support investment incentives or grants to foreign investors. However, informal and ad hoc tax exemptions are used as an investment incentives. The Director of Revenue at the Ministry of Finance is legally the authority for granting them, but in practice ministers and often the Prime Minister have offered tax exemptions to foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no laws or policies that designate any area as a free trade zone or area with special tax treatment. Somaliland is currently constructing a free trade zone dubbed the Berbera Economic Free Zone, funded jointly by the Somaliland government and UAE-based DP World. The agreement was in December 2019 in a ceremony graced by Somaliland President Muse Bihi and the DP World deputy president.

Performance and Data Localization Requirements

The Somali government does not mandate local employment. There are no laws inhibiting foreign investors or foreign employees. Currently there are a few foreign companies operating in Somalia, mostly based within the confines of the secure compound surrounding Mogadishu’s airport. Most of these companies are contracted by either the government or other international organizations to undertake infrastructure and security related projects. In some instances, local companies in the service sector such as hoteliers contract foreign employees with specific skillsets that are not locally available. These companies process entry visas for these employees and later facilitate their return after the expiration of their contracts. DP World operates in Somaliland and Puntland to implement port expansion projects in those regions.

Real Property

When the government collapsed in 1991 there was widespread conflict over land, land-grabbing by warlords, and huge displacement of local populations, especially in southern Somalia. While there is more security in Somaliland, the movement of internally displaced persons within the region and the return of refugees from outside the country has also contributed to significant land disputes.

The various systems used to manage land are complex and include customary rules and traditions used by Somalia’s clan-based society, Western style laws from the periods of colonialization by the Italian and British, remnants of the authoritarian rule of the Barre regime, and Islamic law and tradition. While there have been no federal efforts to catalogue property ownership and title land, some Federal Member States have made efforts to document land ownership for the purposes of taxation. In addition, land within the major cities, including Mogadishu, is generally documented for taxation purposes. There are no specific regulations regarding land leases or acquisition by foreign investors.

The national legal framework related to land tenure is largely limited to Article 26 of the provisional constitution, which states: (1) Every person has the right to own, use, enjoy, sell, and transfer property; and

(1) Every person has the right to own, use, enjoy, sell, and transfer property; and (2) The state may compulsorily acquire property only if doing so is in the public interest. Any person whose property has been acquired in the name of the public interest has the right to just compensation from the State as agreed by the parties or decided by a court.

(2) The state may compulsorily acquire property only if doing so is in the public interest. Any person whose property has been acquired in the name of the public interest has the right to just compensation from the State as agreed by the parties or decided by a court.

The autonomous state of Somaliland has a more advanced land tenure legal framework and dispute mechanisms. The Somaliland legal framework addresses urban land management, agricultural land ownership, urban land dispute resolution, and civil procedures for hearing property disputes.

Intellectual Property Rights

There are currently no laws protecting or enforcing intellectual property rights (IPR). The Ministry of Commerce and Industry sent draft IPR legislation to the cabinet for review in February 2019. In February 2020, both houses of the Federal Parliament approved standardization and quality control legislation, which is currently with the President for signature. This will pave the way for the formation of the Somalia Bureau of Standards (SBS) as the enforcement authority for quality control. There are no official reports on seizures of counterfeit goods. However, the perception is that almost all the goods coming into the country are counterfeit. The government has no capacity to seize or track counterfeit goods entering the country.

Somalia is not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

Capital Markets and Portfolio Investment

Somalia has no structured financial system. It also does not have any form of portfolio investment financial products in the market. The country has no government bonds or corporate bonds. There is one private stock exchange operating in Somalia (http://www.somalistockexchange.so/ ) but the government lacks the authority to regulate the trade in stocks and securities.

Money and Banking System

The Central Bank of Somalia (CBS) was reestablished in 2009 and is slowly developing the capacity to oversee the licensing and supervision of money-transfer businesses and commercial banks. The CBS has registered seven hawalas and 11 banks to provide financial services. Nine of these banks are operational whereas the other two have yet to be operationalized.

Most Somalis do not have access to formal banking services due to the lack of available branches in many parts of the country, as well as the difficulty of obtaining acceptable forms of identification to open bank accounts. There is limited data or information regarding the operations and assets of these privately-owned banks and the CBS has no capacity or competency to regulate them to required standards. At this time, no foreign banks or any branch of a foreign bank operate in Somalia. The Central Bank licensed an Egyptian bank in April 2019 but it is not operational.

Somalia’s financial risk profile remains high due to legitimate concerns about money laundering and terrorism financing. The financial system is stymied by the lack of any national identification, creating challenges for banks and money transfer services to verify client identity. In 2019 the government finalized anti-money laundering/countering terrorism financing (AML/CFT) regulations that will require banks to implement stricter know your customer (KYC) controls. As of September 2019, all licensed banks were providing suspicious transaction reports to the government’s Financial Reporting Center (FRC).

Foreign Exchange and Remittances

Foreign Exchange

While the official currency for Somalia is the Somali shilling, there is very limited use of the currency in the country’s dollarized economy. In addition, a significant portion of day to day transactions are conducted through phone-based mobile money managed by the telecommunications sector. According to the IMF, almost all the current shilling notes in Somalia are counterfeit, illegally printed by individual businesses and regional administrations since the CBS has not issued any new notes since 1991. There is no restriction or limitation on converting or repatriating funds associated with outside investment. The shilling is volatile and fluctuates rapidly against the dollar. Since there is no government agency that determines monetary policy at this time, the exchange rate is set by several currency traders located in Mogadishu’s Bakarat market. The government is planning to print a new currency.

Remittance Policies

For two decades, there was no functioning banking system in Somalia. Instead, informal money transfer systems known as hawalas allowed for the transfer of money to, from, and within Somalia. Somalis in the diaspora remit over $1 billion annually, making up between 20% and 40% of Somalia’s GDP. While the impacts of the COVID-19 pandemic on Somalia’s financial sector are still uncertain, the country is already seeing a drop in remittances. In 2019 the government finalized AML/CFT regulations that require money transfer businesses to implement stricter know your customer (KYC) controls and report suspicious transactions to the government.

Sovereign Wealth Funds

There are no sovereign wealth funds or any other state-owned investment fund.

There are no fully or partially state-owned active enterprises in Somalia.

Privatization Program

The government does not own any business entity, therefore there are no state-owned entities to privatize. The World Bank has supported development of a public-private partnership law but parliament has not yet acted on the draft law.

There are no laws or regulations that encourage corporate social responsibility or define responsible business conducts.

The provisional constitution criminalizes several forms of corruption that include abuse of office, embezzlement of funds, and bribery. The president signed the anti-corruption bill into law in September 2019. The new law will pave the way for the formation of an independent anti-corruption commission on both federal and regional levels. Somalia’s procurement legislation has provisions to address potential conflicts of interest in awarding government contracts, but enforcement is lax. Corruption is rampant in all sectors of government, particularly government procurement. Transparency International ranked Somalia 180 out 180 in its 2019 perceptions of corruption index.

Somalia’s current government has waged a campaign against public corruption and graft, resulting in high profile dismissals and arrests over the past three years. However, without a robust asset declaration mechanism, an updated penal code, and a functioning criminal justice system, including police and prosecutorial services, very few penalties exist for corrupt activities. Legislation on government procurement was passed in 2015 and officially all government contracts must go through an open tender process unless they meet specified conditions for limited competition. However, in practice this has been slow to be implemented and lucrative contracts are still awarded based on close relationships and favors. Moreover, the FGS has not yet established a Procurement and Concessions Board as required in the Procurement Act, which makes it difficult to ensure transparency and accountability in government procurement activities. An interim Procurement Board is in place but meets irregularly. https://mof.gov.so/public-procurement 

Resources to Report Corruption

Currently there is no central agency or office where whistleblowers can report corruption. There is no legal framework to protect whistleblowers. The FGS has not established an Office of the Ombudsman, as provided for in the provisional constitution. In December 2018, the Ministry of Justice and Judiciary Affairs signed a Project Initiation Plan (PIP) with UNDP to help the government strengthen its institutions to fight corruption and promote accountability.

Somalia has a long history of political and clan-based violence that destroyed the basic state institutions that support economic development. Most of Somalia’s infrastructure was destroyed during the 30 years of civil war and violence. While pockets of stability are slowly growing, Somalia remains an insecure environment. Attacks by al-Shabaab, ISIS, regional militias and others can impact individuals and businesses throughout the country. The U.S. State Department advises U.S. citizens against traveling to Somalia.

Somalia is emerging from three decades of political instability and economic hardship that destroyed government institutions, hence hard data is lacking to analyze the status of the current labor market in Somalia. According to UNICEF in 2017, 75 percent of the population is under the age of 30, with 67 percent youth unemployment. There is a mismatch between the skills the youth possess and the requirements of the labor market.

The International Labor Organization (ILO) has finalized the 2020 survey of Somalia’s labor force. Most labor is unskilled and the majority of Somalis work in the informal sector or agriculture. All sectors of Somalia’s economy lack capacity due to the lack of skills and education of the potential workforce.

There have been some international projects to improve vocational training, but these reach a small portion of the workforce. The private sector, most notably the major telecommunications companies, maintain their own training programs in order to meet the needs of their workforce. Somalia currently does not have a formal labor or employment policy that would limit the hiring of foreigners. In 2019 Somalia finalized a modern labor code and in February 2020 released a social safety net policy. Combined, these policies provide baseline guidance for protecting workers but lack a strong enforcement mechanism.

Past conflicts between the government and labor unions resulted in a formal complaint to the ILO in 2018. Since the filing of that complaint, the government has stopped limiting the activities of the labor unions and has worked cooperatively with the labor union umbrella organization to draft labor policies and codes.

The ILO established an office in Mogadishu in 2018 to address the significant gaps between Somalia’s labor practices and international standards. In February 2019, Somalia’s government, with the support of the ILO and the labor unions, finalized work on a draft employment policy and updated labor codes, currently before the cabinet for adoption. The guidance is aimed at providing stability and clarity to employers and investors.

DFC currently does not fund any projects in Somalia. There are no OPIC active investment agreements in Somalia, though OPIC has provided risk insurance to serval organizations operating in Somaliland.

Table 3: Sources and Destination of FDI
No data available.

Table 4: Sources of Portfolio Investment
No data available.

Shella Biallas
Economic/Commercial Officer
U.S. Embassy Mogadishu
Biallassa@State.gov

Alinoor Hassan
Economic/Commercial Specialist
U.S. Embassy Mogadishu
HassanAR@State.gov