Although the Federal Government of Somalia (FGS) welcomes foreign direct investment, Somalia remains a difficult place to do business. The government’s collapse in 1991 led to a period of conflict and clan warfare. Although there has been some progress since the 2012 establishment of the FGS, potential investors still face challenges such as the lack of a comprehensive legal framework, a civil judicial system incapable of solving disputes and enforcing contracts, and endemic corruption. Investors also face the threat of al-Shabaab, which controls portions of the country and routinely extorts taxes from businesses. Finally, businesses face challenges moving money into and out of Somalia, have no intellectual property protection, and must cope with expensive and unreliable electricity.
The current government was elected in 2017 and has pursued a policy of economic reforms that broadened the government’s tax base and strengthened tax administration, leading to steady increases in domestic revenue for the first time in two decades. These reforms also allowed Somalia to start re-engaging with international financial institutions, and in March 2020, the IMF and the World Bank approved Somalia’s eligibility for debt relief under the Heavily Indebted Poor Countries Initiative. If Somalia takes the additional steps required to reach “Completion Point,” the final stage of debt relief, the country’s total external debt will be reduced from $5.2 billion to $557 million, or nine percent of GDP. However, 2020 brought challenges associated with the COVID-19 pandemic, floods, drought, and locust infestations, which led to decreased tax revenue and an economic contraction.
Moving money into and out of Somalia remains difficult, and the financial sector is constrained by the lack of private sector correspondent banking relationships. The main obstacles are weak “know your customer” (KYC) capabilities and concerns that al-Shabaab is using Somalia’s financial institutions to collect, store, and move money. To address these concerns, the Financial Reporting Center (FRC), Somalia’s financial investigation body, hired its first investigators in 2019 and is slowly improving its capabilities to investigate illegal transactions. Additionally, the Central Bank of Somalia (CBS) is becoming increasingly professional and asserting its jurisdiction over additional financial activities, such as mobile money.
Despite economic reforms, according to Transparency International’s Corruption Perceptions Index, Somalia again ranked as one of the most corrupt countries in the world in 2020, tied with South Sudan in last place.
|TI Corruption Perceptions Index||2020||179 (tied) of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||190 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2020||N/A||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||1990||$130 USD||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|