Mired in political instability and famine, Somalia remains a failed state. Institutions and policies necessary for meaningful economic progress are largely absent, and much of the population lives in severe poverty. Agriculture is the most important sector, with livestock normally accounting for about 40 percent of total domestic output and more than half of Somalia’s limited export earnings.
Economic Freedom Snapshot
- 2016 Economic Freedom Score: Not Graded
- Economic Freedom Status: Not Graded
- Global Ranking: Not Ranked
- Regional Ranking: Not Ranked in Sub-Saharan Africa
- Notable Successes: N/A
- Concerns: N/A
- Overall Score Change Since 2012: N/A
Lack of revenue collection and poor management of public finance continue to constrain economic development, leaving Somalia almost totally dependent on foreign assistance. The lack of physical security in most parts of the country perpetuates weak institutional capacity and remains a serious obstacle to economic reconstruction.
Since the collapse of longtime dictator Siad Barre’s regime in 1991, various peacekeeping forces have protected a succession of weak and short-lived governments. The current AMISOM multinational force was inaugurated in 2007. A provisional constitution was passed in August 2012, and Hassan Sheikh Mohamud was elected president in September. Pirate hijackings have nearly ceased, and the Islamist terrorist group al-Shabaab has been pushed from major strongholds, though it remains a potent threat. In September 2014, al-Shabaab leader Ahmed Abdi Godane was killed in a U.S. airstrike; he was replaced by Ahmad Umar. GDP and living standards are among the world’s lowest, and the population depends on foreign aid and remittances. Economic growth is slowly expanding beyond Mogadishu, which has been recovering since al-Shabaab retreated to rural areas beginning in 2011.
Corruption is rampant in Somalia, tied with North Korea for last place among the 175 countries surveyed in Transparency International’s 2014 Corruption Perceptions Index. In 2013, the U.N. reported that 80 percent of withdrawals by government officials from the Somali central bank were for private purposes. The provisional constitution outlines a judicial framework, but none of its institutions have been established.
There is no effective national government that can provide basic services. Other than the collection of very limited duties and taxes, little formal fiscal policy is in place. A new income tax law has been submitted to parliament for approval, but the lack of productive economic activity severely constrains the government’s ability to generate revenues.
An outmoded regulatory environment and inadequate infrastructure deter the formation and operation of businesses. The labor market is dominated by informal hiring practices. In 2015, the IMF held the first Article IV consultation with Somalia in 25 years. Despite almost nonexistent national governance, the informal agricultural, construction, and telecommunications sectors have registered positive growth without subsidies.
Much of the population remains outside of the formal trade and banking sectors, and private investment remains extremely limited. Somali diaspora remittances continue to be an important source of foreign exchange and economic support for the majority of Somalis. These financial inflows assist households in confronting poverty and financing basic needs.