December 15, 2006 FROM THE ECONOMIST INTELLIGENCE UNIT

OVERVIEW: The rise of the Union of Islamic Courts (UIC) militia in Somalia has changed the dynamic of power in the country significantly. The UN, the EU and the US will continue to back the interim government, as will its closest ally, Ethiopia. Somaliland's chances of international recognition will remain slim in the forecast period.

DOMESTIC POLITICS: The forces of the Union of Islamic Courts (UIC) now rule most of the country south of the Mudug region, with the exception of a small enclave centered on Baidoa, which is the base of the Federal Transitional Parliament (FTP) and of the interim administration, which is still nominally the internationally recognized successor to 15 years of anarchy in Somalia. This interim government is weak, but has the political—and, most believe, military—support of Ethiopia, a factor that has dissuaded the UIC from precipitating an armed confrontation. The interim president, Abdillahi Yusuf Ahmed, has continued to claim that the UIC is linked to international terrorists, in an attempt to marshal international opinion against it—although he has had only limited success. Negotiations between the UIC and the interim government will continue, as the government will be hoping to remain relevant on the local political scene. No international peacekeepers are expected to be deployed in the near term, as the UIC is firmly set against this.

International recognition remains a key objective for Somaliland; this moved closer with the country's first multiparty parliamentary election in September 2005, but will be heavily influenced by events in the south. The EU, the UK and the US are thought to be broadly in favor of officially acknowledging Somaliland's de facto sovereignty, but none is likely to be the first to grant recognition.

INTERNATIONAL RELATIONS: The UIC's declaration in October of "holy war" against Ethiopia, which is viewed by many in Somalia as a Christian power with imperialist tendencies, has renewed fears in the international community that a confrontation is now increasingly likely. Domestically, these fears have driven many Somalis to flee to Kenya in recent months. Another fear is that fighting between the UIC and Ethiopia could give foreign Islamic fighters an excuse to join the fray as Somalia becomes the latest battleground of Islam against the West. A worst-case scenario sees the conflict widening out across the Horn of Africa, with Islamist forces backed by Eritrea, Ethiopia's arch-rival, fighting against Ethiopian forces and the army in Somaliland, which has said that it will fight to maintain its political separation from the south.

POLICY TRENDS: The economic impact of control by a single governing body, the UIC, that no longer allows gunmen to extort money from Lorries taking goods to market is being felt in areas controlled by the UIC. The effect has been beneficial for the distribution of food aid, with Mogadishu's seaport being reopened to shipping after 11 years of closure. The UN World Food Programme (WFP) announced that on September 3rd it made its first delivery of food aid through the port of Mogadishu —destined for the drought-stricken Bay and Bakool regions —since 1995. Use of the port, which had been closed because rival clan factions could not agree on how to share revenue from the facility, should significantly cut the distribution cost of humanitarian aid in Somalia.

ECONOMIC GROWTH: The effective maintenance of law and order, a characteristic associated with Islamic court rule, has brought economic dividends to those areas under UIC control. If such conditions continue to prevail, the areas where Islamic courts operate have the best prospects for viable economic growth within the 2007-08 forecast period. In the longer term there is a high likelihood of a "peace dividend", including increased foreign aid, if and when institutions of governance can be re-established at the national level. This depends on a workable arrangement between Mr. Yusuf's interim administration and the UIC. In practice, however, for much of the forecast period most Somalis will continue to rely heavily on remittances from abroad, thought to total at least US$825m each year (roughly 60% of GNP in 2004). Long-term goals of poverty alleviation and consistent economic growth remain distant prospects.

INFLATION AND EXCHANGE RATES: The prices of many basic food items have fallen in recent months, particularly in the Shabelle Valley, not least because the roadblocks manned by gunmen levying their own form of ad hoc taxation have been cleared away. In Mogadishu the Somali shilling appreciated against the US dollar by 6% during the month of September.

SOURCE: Country outlook

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