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Issue 546/ 14th - 20th July 2012
Somaliland: Prospects For Economic Development And Future Priorities For Investment
By Adam Ismail Hassan PhD
It is no secret that the bulk of state-rebuilding efforts and activities were initially focused more on peace and security rather than on building the capacities of public institutions to deliver basic services such as health, water and education to the poor and the vulnerable sections of the society, and those consecutive governments were not in a position to regulate the growing private and non-state sectors which filled in the vacuum left by the central government, after the collapse of the Somali state in 1991.
Having established peace, reconciliation and security Somaliland has now entered into a period where it needs to consolidate its achievements in terms of developing governmental institutions and functions, promoting economic growth and recovery as well as good governance and democratization. The new government headed by President Ahmed Mohamed Mohamoud (Silanyo) is expected to focus more on its core economic development activities and functions, including: formulating and implementing strategies, policies, regulatory frameworks and mechanisms etc. with a view to enable the right environment for economic recovery, livelihood improvements, employment creation, fair competition and equitable access to resources as well as investment opportunities. This article is a prelude to many future articles that I intend to write with a view to get away from the political morass and intellectual inept that has befallen on the academics of Somaliland who rarely write and/or debate about the pros and cons of the economy and the direction of the country in terms of socio-economic development and ways of improving the lives of its citizens. The article outlines the prospects of Somaliland’s economic development and future investment priorities with a view to elucidate how Somaliland is poised to take advantage of its peace and stability dividend and those opportunities offered by friendly countries and private investors from different parts of the world.
2. ROLE OF THE GOVERNMENT
In addition the government must commit itself to building on community level participation and effective management at the local level. The government must not see itself as the producer and manager of the economy, but rather as a regulator and promoter of the entrepreneurial energies of the people of Somaliland. It will only enter into a direct managerial role when social justice demands its presence and interventions. The government, through its public sector service providers (i.e. Ministries and semi-autonomous agencies), must act in partnership with all relevant economic actors including; private sector, NGOs, donors, UN organizations and the national and international investors to implement its economic development programs, and realize its vision for the country, as articulated by the ruling party (Kulmiye) during last year’s Presidential election, in which it won on that platform. Furthermore, as the legitimate representative of the people of Somaliland the key tasks and challenges of the government is to create the institutions and organizations that would embody principles and practices of democratization, accountability and good governance, and encourage the private sector to become the driving force behind sustainable economic development and improve the future prospects of the country.
One of the areas that the government must seek to mitigate is the large importers who are supposed to limit their business activities solely on wholesale and not get involved in retail business which puts legitimate small business at a competitive disadvantage. Setting out clear rules and regulations in terms of business license would mean that the government policies will encourage the formalization of the economy as a major contribution to the overall economic development of the country with a particular emphasis on medium, small and micro enterprises (MSMEs). In the meantime the government must strengthen the institutions that impact on private sector development within the formal economy to create a level playing field; improving enforcement, eliminating corruption and reducing red tape, bureaucracy and wastage because all these things tend to serve as a disincentive to foreign investment, and reduce government revenues. In addition to the above the government must understand that Somaliland’s economy is what is called cash economy or “dollarized economy”, which means that our economy is dependent on maintaining the exchange rate of both the local currency and the US Dollar at a stable level and this could be easily done by allocating a small reserve of less than US $2 million to maintain the supply and demand of both currencies (a whole article will be written on this issue, in which the Ministry of Finance seems to be oblivious).
3. PRIVATE SECTOR
One of the major changes in Somaliland over the past decade has been the phenomenal growth of the private sector. Indeed, Somaliland’s private sector has experienced rapid growth that is more in line with the fast growing economies of Asia (China and India) during the past 10 years. Although there are no reliable statistical figures showing the scale of economic growth, it is estimated that in Somaliland, the economy has been growing between 8% and 11% for the past 5 years and had not been affected by the downturn in the global economy. Some of the main businesses that have been growing most include; remittances, telecommunications and Import-Export companies as well as the service sector like hotels and restaurants and small industries.
Although this growth has been closely linked to the processes of globalization another major factor is the spread of many Somalilanders in the Diaspora, as refugees, and the staggering amount of money, estimated between US $650 and $800 million that they remit annually back to the country. In the context of weak and often ineffectual public sector, the private sector has been playing an instrumental role in providing social services and shaping economic development and recovery. As market economy has replaced the centrally planned economy, development had become market-driven rather than government-led. The absence of restrictive government regulations and controls has tended to encourage competition and entrepreneurship. On the other hand, and somewhat paradoxically, lack of government regulations has allowed a handful of private companies to dominate essential sectors like food imports and telecommunications. Nevertheless, in Somaliland, the successes of the private sector could not be underestimated, and the future investment and growth prospects for the whole economy appear to be very promising, provided that the financial services and banking sectors are “unchained” and strengthened.
This vibrant private sector has not only moved into establishing basic markets such as wholesale and retail trading but has also entered into critical social services such as health and education as well as financial sectors. For example, there are private hospitals and clinics which offer health care provisions to the public and in education private schools and colleges run alongside the public ones. However both of these sectors need to be regulated by the government otherwise unscrupulous profiteers could cause more harm than good, which appears to be the case now in areas like private hospitals and clinics where there is no regulation whatsoever and the higher education where every tom, dick and harry could come, rent out a bungalow and call it a “university” without any regulations from the part of the Ministry of Education, whose lack of resolve to tackle such a failure was made apparent by the recent formation of “commission of higher education” which is not even worth to be called commission of higher education but rather a Ministerial Committee chaired by the Minister which is neither independent nor free from conflict of interest (a whole article is coming soon on this important subject).
In terms of the financial services it is remittance companies who provide basic banking provisions such as deposit and savings accounts in the absence of proper banking services. The success of the private sector in Somaliland has encouraged traders to penetrate markets in neighbouring countries and remained competitive. Given the success of the private sector in Somaliland it is believed that over-regulation is not the answer for economic development, however it is equally believed that free-market alone cannot meet the needs of the poor and the weak members of the society. To put it differently heavy regulation carries the risk of corruption, weak property rights, and state capture, just as private solutions have their limits in correcting for the market failures, hence both approaches can stunt growth and sustainable development, and that is why it is extremely important to find a balance between appropriate government regulations and thriving free markets.
4. FINANCIAL SECTOR
This means that an efficient financial sector is a crucial enabler of
economic growth and income generation. On the one hand government
institutions will create the stable macro-economic environment that is
vital for sustainable economic growth and private sector development. On
the hand financial institutions are critical in channelling scarce
resources to the areas in which they are most productive and in enabling
transactions between savers and investors in financial intermediation.
Hence it is imperative that the financial sector development should form
one of the main pillars of the new government’s private sector
development agenda by doing the following:
5. CREATING ENABLING ENVIRONMENT
The experience of Somaliland for the past decade or so has shown that economic growth and sustainable development would require essential infrastructures to be established across the country. Hence there is a consensus in development economists on the need for investment in infrastructure as a means of creating employment and promoting growth and equity and to keep the government out of the business and services that private sector can deliver more efficiently. It is equally imperative that clear policies and strategies put forward by the government vis-à-vis the implementation of infrastructure projects which will be entrusted to the private sector, including international companies through, for example, Public Private Partnership (PPP) arrangements and these companies must be given incentives to invest in all infrastructure development projects across the country.
In order to fulfill such a role for the promotion of the private sector for service delivery and infrastructure development, the government will need to acquire the capacity for setting priorities, evaluating alternative policy options, and regulating and monitoring the activities of its implementing partners and managing infrastructure facilities. In considering the options, the government has to promote the use of labor-intensive methods to create employment and generate income. In this regard the government must be committed to creating the enabling environment for the operation of national and international firms that would implement its major development projects through performance-based contracting. International best practice must be drawn upon to promote the emergence of Somaliland’s investment portfolio. Timely preparation of infrastructure projects depends on an effective planning and the government, investors and donors should work together to attract reputable international firms into the country and promote joint ventures between capable local institutions and potential international firms.
In addition the government must be fully aware that the successful transformation of the economic fortunes for the people of Somaliland will depend on the capacity development of all economic actors (public, private and non-state sectors). In this regard the government must recognize the strengths and constraints of various actors and institutions that will be the key towards the successful rebuilding of the country and improving the livelihoods of its population.
6. INVESTMENT PRIORTY SECTORS
7. OTHER SECTORS FOR INVESTMENT
Another area that has got huge potential for investment and could transform the future economic prospects of the country and its small population is hydro-carbon deposits including oil and gas which can be explored. Oil has already been identified and discovered in various sites (both on/off-shore) of the country. Some of these discoveries go back to the 1950s and 1980s. There is no doubt that the increasing global demand for oil fuelled by the expanding Asian economies will make Somaliland’s oil drilling prospects more urgent than before and it would be sensible if the right institutions were to be established to pave the way for oil drilling and the distribution of any wealth from that oil to the poverty stricken population of the country.
Adam Ismail Hassan PhD