Executive Summary

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.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
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

Policies Towards Foreign Direct Investment

The FGS and the Federal Member States (FMS) have a positive attitude towards foreign direct investment (FDI).  However, insecurity and uncertainty driven by terrorist groups, lack of transparency, failure to fully constitute governing bodies per the 2012 provisional constitution, and widespread corruption in government sectors present considerable barriers to FDI.

Parliament passed a foreign investment law in 2015 to promote and protect foreign investment.  The law also provides some incentives to foreign investors, such as tax advantages and guarantees against expropriation.

In September 2020, Somalia’s investment promotion authority, Sominvest, released a five-year National Investment Promotion Strategy, which aims to improve the investment climate and Somalia’s image abroad.  This strategy paints a rosy picture of doing business in Somalia and suggests the key areas with potential for foreign investment are agriculture, fishing, energy, and banking.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no laws that address private ownership rights or limit foreign control.

Other Investment Policy Reviews

There has not yet been a third-party investment review of Somalia.

The FGS is not a member of the World Trade Organization (WTO) or the Organization for Economic Cooperation and Development.  In 2017 Somalia submitted a notification of intent to join the WTO, and in May 2020, after working through the accession stages, Somalia submitted a Memorandum on the Foreign Trade Regime, a document that outlines its trade and economic policies and its trade agreements with other countries.  The WTO confirmed Somalia’s Working Party chairperson, Swedish Ambassador to the WTO Mikael Anzen, in October 2020 and is planning the first Working Party meeting for mid-2021.

The FGS rejoined the Common Market for Eastern and Southern Africa in July 2018.  As a member, Somalia is required to undertake several institutional, policy, and regulatory reforms to meet the organization’s free trade protocols.

The FGS has applied for East African Community (EAC) membership, which would allow Somalia to formalize trade with its neighbors and facilitate movement of Somali citizens to other EAC member states through acquisition of the common EAC passport.  However, at the February 2021 Heads of State Summit, the EAC found that Somalia’s application was not yet ready for a decision.

Somalia has also indicated its intent to participate in negotiations on the African Continent Free Trade Agreement.

Business Facilitation

In 2019 the FGS passed a company law formalizing the legal requirements to create and register a company.  Also in 2019, the Ministry of Commerce and Industry announced the launch of a “one-stop shop” business registration website, but it has not yet become operational.

The World Bank ranked Somalia 190 of 190 countries in its 2020 Ease of Doing Business Report.

Outward Investment

The Somali government does not have a policy that promotes or incentivizes outward investment.  Anecdotal evidence suggests that Somalis who accumulate wealth seek to move it overseas to avoid the uncertain domestic investment environment.

Somalia does not have a bilateral investment treaty with the United States.  It does have bilateral investment treaties with Egypt and Germany.  Somalia and Turkey signed a bilateral investment treaty in 2016, but it has not yet come into force.

Somalia does not have a bilateral taxation treaty with any country.

Transparency of the Regulatory System

Somalia’s regulatory system is largely nonexistent.  The 2012 provisional constitution has not been finalized, and there is not yet a constitutional court to enforce it.  Many of the current investment laws and regulations predate the 1991 government collapse.  The FGS has revised some of these regulations and has begun to develop modern business and investment legislation to conform to the global business environment, but it has a long way to go.  Somalia has a procurement act that is intended to provide for transparency in public contracts and concessions, but it is not always followed.  In 2020 the FGS passed a petroleum law that provides a regulatory framework for issuing exploration and development licenses.

International Regulatory Considerations

Somalia is a member of the Intergovernmental Authority on Development, as well as the Arab League and the Organization of Islamic Cooperation.  In 2018 Somalia obtained provisional membership in the Common Market for Eastern and Southern Africa, but it has several conditions to fulfill before achieving full membership.  Somalia is not yet a member of the WTO.

Legal System and Judicial Independence

Somalia’s legal system derives from Italian and British law, customary dispute resolution (xeer) principles, and Islamic law.  The provisional constitution establishes a judicial system that is theoretically independent of the executive and the legislature, but in practice the legal system depends on the executive.  There are no courts dedicated to commercial disputes.  A November 2020 USAID-funded report found that the courts lack political independence, are marked by “pervasive graft,” and face competition from a parallel al-Shabaab court system.  There are reports that some citizens choose to bring cases to al-Shabaab courts, finding them less corrupt than government courts.

Laws and Regulations on Foreign Direct Investment

Somalia’s 2015 foreign investment law provides some guidance for foreign investors, but a comprehensive investor and investment bill remains stuck in parliament.  In 2019 the Ministry of Planning opened its investment promotion office, Sominvest, to provide potential investors with guidance on working in Somalia.

Competition and Antitrust Laws

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

Expropriation and Compensation

Somalia is rebuilding from decades of civil war, and its legal and regulatory environment remains undeveloped.  There are no laws that define how the government can expropriate private property.  However, the provisional constitution provides a right to just compensation from the government if property has been compulsorily acquired in the public interest.  After the 1991 government collapse, many state-owned properties ended up in private hands, and the FGS has indicated interest in repossessing these properties.  There is a draft investors protection bill in parliament that will address expropriation, dispute resolution, and the transfer and repatriation of investments.

Dispute Settlement

ICSID Convention and New York Convention

Somalia is not a party to the Convention on the International Centre for Settlement of Investment Disputes 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 of the diaspora, many of whom operate them as Somali businesses rather than foreign entities.  The FGS still has not passed the investor and investment bill, which could provide a legal framework for investor-state dispute settlement.  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 the 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 a signatory to any convention on commercial arbitration, and local courts have limited capacity to enforce their own decisions.  Domestically, parties often resort to a local council of elders, clan elders, religious leaders, or al-Shabaab to settle disputes.  Many foreign companies rely on arbitration courts in Djibouti or the United Arab Emirates (UAE).  The Intergovernmental Authority on Development is developing a regional initiative to establish a business dispute and arbitration center in Djibouti.

Bankruptcy Regulations

Somalia has no bankruptcy laws.

Investment Incentives

The 2015 foreign investment law provides some investment incentives, such as tax benefits, to foreign investors.  The government does not issue grants or jointly finance foreign direct investment projects, but the FGS informally uses ad hoc tax exemptions and revenue sharing agreements to attract investment.  The director of revenue at the Ministry of Finance has authority to grant tax exemptions, but in practice line ministers and the prime minister have offered tax exemptions to foreign investors.  Sominvest is developing a national investment incentive framework.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no laws or policies that designate any area as a free trade zone or as an area with special tax treatment.  Pursuant to an agreement signed in December 2019, the semi-autonomous state of Somaliland is constructing a free trade zone dubbed the Berbera Economic Free Zone, funded jointly by the Somaliland government and UAE-based Dubai Ports World.

Performance and Data Localization Requirements

The FGS does not require local employment.  There are no laws inhibiting foreign investors or foreign employees.  Few foreign companies operate in Somalia, and most of them are based within the secure compound surrounding Mogadishu’s airport.  Most of these companies are under contract to the FGS or an international organization to undertake infrastructure and security-related projects.  Some are in the service sector, such as hotels.  Foreign companies may contract with foreign employees with specific skillsets not locally available and can obtain entry visas for these employees.

Real Property

Somali laws relating to land are complex and include customary rules and traditions used by Somalia’s clan-based society, Western-style laws from the colonial period, remnants of the pre-1991 authoritarian rule, and Islamic law and tradition.  While there have been no federal efforts to catalogue property ownership and title land, some FMS have tried 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.

When the government collapsed in 1991, there was widespread conflict over land, land-grabbing by warlords, and displacement of local populations, especially in southern Somalia.  As a result, fraudulent titles and land disputes are common.  A former government official moved all records of pre-1991 property registrations outside the country.  Requests to verify titles registered before 1991 therefore take a month to be processed and cost between $1,000 and $2000.  For properties registered more recently, records may be available in the official bulletin.  Lawyers charge approximately $50 to verify a title’s authenticity.

Somaliland has a more advanced land title framework and dispute mechanism.  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 no laws protecting or enforcing intellectual property (IP).  The cabinet approved a new IP law in 2019, but parliament has not yet approved it.  The FGS passed a law on standardization and quality control in March 2020 that provides for the creation of the Somalia Bureau of Standards as the enforcement authority for quality control.  Although there are no official reports on seizures of counterfeit goods, it is widely believed that many goods entering Somalia are counterfeit.  The government has no capacity to seize or track counterfeit goods entering the country.  For additional information about national laws and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles.

Capital Markets and Portfolio Investment

Somalia has no structured financial system and does not have portfolio investment financial products in the market.  Somalia does not issue government bonds or corporate bonds.  There is one private stock exchange operating in Somalia, but the government has no authority to regulate trade in stocks and securities.

Money and Banking System

Somalia’s banking system has yet to recover from years of conflict.  Moving money into and around the country through traditional banking mechanisms is difficult.  The Somali shilling lacks legitimacy, as it has not been printed since 1991 and more than 98 percent of the bills in circulation are counterfeit, printed by warlords and rogue businessmen.  Consequently, much of the Somali economy relies on the U.S. dollar.

Since the FGS reestablished the CBS in 2009, it has been slowly developing the tools and capabilities to oversee licensing and supervision of commercial banks and money transfer businesses.  The CBS has issued licenses to 10 banks and seven informal money transfer systems known as hawalas.  A 2019 anti-money laundering/countering the financing of terrorism law requires enhanced KYC controls and created the government’s financial investigation unit, the FRC.  Nevertheless, a 2020 UN report found that al-Shabaab moves millions of dollars through the formal banking system, which keeps Somalia’s financial risk profile high.  Somalia’s banks are also stymied by the lack of any national identification, which creates challenges in verifying client identity.

Only 15 percent of Somalis have formal bank accounts due to a lack of branches in many towns and the difficulty of obtaining acceptable forms of identification to open accounts.  Mobile finance therefore plays an important role in the economy.  Mobile money platforms have been essentially unregulated since their introduction in 2012.  In February 2021 the CBS issued its first mobile money license.

There is no publicly available data regarding the assets of privately owned banks.  No foreign banks operate in Somalia.  The CBS issued an interim license to an Egyptian bank in April 2019, but the bank has not opened.

Foreign Exchange and Remittances

Foreign Exchange

While the official currency for Somalia is the Somali shilling, almost all of the currency in circulation is counterfeit.  As a result, Somalia’s economy is largely dollarized, and a significant portion of daily transactions are conducted through phone-based mobile money managed by telecommunications companies.

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 currency traders located in Mogadishu’s Bakara market.  The government has plans to print a new currency but does not have the budget do so in the near term.

Remittance Policies

For two decades there was no functioning banking system in Somalia.  Instead, hawalas transferred money into, out of, and within Somalia.  Somalis in the diaspora remit more than $1 billion annually, accounting for between 20 and 40 percent of Somalia’s GDP.  While the effects of the COVID-19 pandemic on Somalia’s financial sector are still uncertain, during the early stages of the pandemic the country saw a drop in remittances.

Sovereign Wealth Funds

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

Somalia has no fully or partially state-owned enterprises.

Privatization Program

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

Somalia has no fully or partially state-owned enterprises.

Privatization Program

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

There are no laws or regulations addressing corporate social responsibility or responsible business conduct.

 

Additional Resources

Department of State

Department of Labor

The provisional constitution criminalizes several forms of corruption such as abuse of office, embezzlement of funds, and bribery.  The FGS enacted an anti-corruption bill in September 2019 that provides for the formation of an independent anti-corruption commission at both federal and state levels.  Somalia’s procurement laws have 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 179 (tied) of 180 countries in its 2020 Corruption Perceptions Index.

For the past several years, the FGS has waged a campaign against public corruption and graft, resulting in several high-profile dismissals and arrests.  For example, in August 2020 a court convicted four senior Ministry of Health officials of embezzling funds intended to address the COVID-19 pandemic.  However, without a robust asset declaration mechanism, an updated penal code, and a functioning criminal justice system, anti-corruption efforts remain ad hoc, and there is little deterrence.

Procurement laws require all government contracts to go through an open tender process unless they meet specified conditions for limited competition.  However, the FGS has not put the relevant procedures in place, and in practice the FGS still awards lucrative contracts based on close relationships and favors.  Moreover, the FGS has not yet established a procurement board as required by law, which further stifles attempts to ensure transparency and accountability in government procurement activities.  An interim procurement board exists, but it meets irregularly.

Resources to Report Corruption

There is no central agency or office for whistleblowers to report corruption, and there is no legal framework to protect whistleblowers.  The FGS has not established an Office of the Ombudsman, as required by the provisional constitution.

Somalia has a long history of political and clan-based violence, which destroyed the basic state institutions that support economic development.  Most of Somalia’s infrastructure was destroyed during 30 years of civil war and violence.  There are pockets of stability, but Somalia remains an insecure environment.  Attacks by al-Shabaab, clan-based militias, and others affect individuals and businesses throughout the country, often with loss of life.  The U.S. Department of State advises U.S. citizens against traveling to Somalia due to crime, terrorism, and civil unrest.

Somali law provides for the right of every worker to form or join a trade union, participate in union activities, conduct legal strikes, and engage in collective bargaining.  Although the law does not specifically address anti-union discrimination or the reinstatement of workers fired for union activity, in February 2021 a Somali court issued a decision reinstating an employee who had been dismissed for union organizing.

Somalia is emerging from three decades of political instability and economic hardship that destroyed government institutions, leaving little data on the status of the current labor market.  According to UNICEF statistics from 2017, 75 percent of the population is under the age of 30, and 67 percent of youth are unemployed.  There is a mismatch between the skills youth possess and the requirements of the labor market.  In 2020 the International Labor Organization (ILO) finalized its survey of Somalia’s labor force, finding that most labor is unskilled and most Somalis work in the informal sector or agriculture.

Some international partners implement projects to improve vocational training, but these reach a small portion of the workforce.  The private sector, such as the major telecommunications companies, maintain their own training programs to meet the needs of their workforce.  Somalia does not have a formal labor or employment policy that would restrict the hiring of foreigners.  Somalia has drafted a modern labor code, but it has yet to be enacted.  In February 2020 the FGS released a social safety net policy.

Conflicts between the government and labor unions resulted in a formal complaint to the ILO in 2018.  Since the complaint’s filing, the government has stopped limiting the labor unions’ activities 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.  With ILO and labor union support, in February 2019 the government finalized a draft employment policy, which the cabinet approved.

DFC has one project in Somalia, a guarantee of $2.7 million to support the installation and operation of solar projects.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2019 $4,944 https://www.imf.org/-/media/Files/Publications/
CR/2021/English/1SOMEA2021002.ashx
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A N/A N/A BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP N/A N/A 2019 29.9% UNCTAD data available at
https://stats.unctad.org/
handbook/EconomicTrends/Fdi.html

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

Paul Gormley
Economic/Commercial Officer
U.S. Embassy Mogadishu
GormleyPJ@State.gov

2021 Investment Climate Statements: Somalia
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