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Viewing cable 85MOGADISHU1175,

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Reference ID Created Released Classification Origin
85MOGADISHU1175 1985-01-31 05:31 2011-08-30 01:44 UNCLASSIFIED Embassy Mogadishu
R 310531Z JAN 85
FM AMEMBASSY MOGADISHU
TO SECSTATE WASHDC 2011
DEPTOTREAS WASHDC
INFO AMEMBASSY NAIROBI
AMEMBASSY ROME
UNCLAS SECTION 01 OF 08 MOGADISHU 01175 
 
TREASURY FOR OASIA/IDN DEBORAH ROCHA 
STATE FOR EB/IFD/ODF FOR CHARLES ENGLISH 
AID/PPC/EA FOR KEN KAUFMANN 
ROME ALSO FOR MFO/MILLIKEN 
 
E.O. 12356: N/A 
TAGS: EFIN ECON EAID SO
SUBJ: ECONOMIC POLICY PROFILE:  SOMALIA 
 
REFS: A) 84 STATE 369917    B) 84 MOGADISHU 1091 
 
1.  ECONOMIC PROSPECTS AND POLICIES: 
- 
2.  RESOURCES AND INFRASTRUCTURE:  SOMALIA IS A LARGE, 
SPARSELY SETTLED COUNTRY OF 5 MILLION PEOPLE, WHOSE 
MAJOR RESOURCES ARE ITS LAND AND LOCATION.  SITUATED 
ADJACENT TO THE MARKETS OF THE PERSIAN GULF, AND 
WITHIN EASY SHIPPING RANGE OF EUROPE, SOMALIA POSSESSES 
A LAND AREA OF APPROXIMATELY 64 MILLION HECTARES. 
OF THIS, ABOUT 8.2 MILLION HECTARES ARE ARABLE, BUT, 
WITH WATER AND AGRICULTURAL LABOR LIMITING FACTORS 
ONLY ABOUT 900,000 HECTARES ARE UNDER CULTIVATION.  OF 
THE REMAINING LAND, ABOUT 60 PERCENT IS SUTIABLE FOR 
GRAZING WITH THE BALANCE WASTE.  ITS FISHING POTENTIAL 
AND MINERAL RESOURCES REMAIN LARGELY UNKNOWN AND UN- 
EXPLOITED, THOUGH SIX FOREIGN OIL COMPANIES ARE 
CURRENTLY ENGAGED IN SURVEYS AND EXPLORATION.  THE 
NATIONAL INFRASTRUCTURE  BASE IS WEAK, WITH ONLY TWO 
MAJOR URBAN CENTERS (MOGADISHU AND HARGEISA), THREE 
DEEPWATER PORTS (MOGADISHU, KISMAYO AND BERBERA), A 
POORLY DEVELOPED INTERNAL ROAD NETWORK, AND NO RAILROAD. 
PUBLIC UTILITY, EDUCATIONAL AND HEALTH SERVICES ARE 
LARGELY CONFINED TO THE MAJOR CITIES.  THE HUMAN 
RESOURCE BASE IS ALSO WEAK, WITH MANAGERIAL AND 
TECHNICAL SKILLS PARTICULARLY SCARCE. 
- 
3. STRUCTURE OF THE ECONOMY:  THE ECONOMY IS DOMINATED 
BY THE AGRICULTURAL SECTOR, AND WITHIN AGRICULTURE BY 
LIVESTOCK PRODUCTION.  OVERALL GDP (AT CURRENT MARKET 
PRICES) WAS ABOUT US DOLS 1.3 BILLION IN 1983; WITH A 
POPULATION (INCLUDING REFUGEES) OF 5 MILLION, PER 
CAPITA GDP WAS ABOUT US DOLS 260.  LIVESTOCK PRODUCTION 
NORMALLY ACCOUNTS FOR ABOUT 38 PERCENT OF GDP; 50-60 
PERCENT OF TOTAL EMPLOYMENT AND 80 PERCENT OF EXPORT 
EARNINGS.  CROP PRODUCTION CONTRIBUTES ABOUT 7-10 
PERCENT OF GDP, WITH BANANAS THE ONLY IMPORTANT EXPORT 
CROP, AND SORGHUM, MAIZE AND SESAME GROWN FOR LOCAL 
CONSUMPTION.  THE MANUFACTURING SECTOR IS SMALL 
(7 PERCENT OF GDP), INEFFICIENT, AND DOMINATED BY 
38 PUBLIC CORPORATIONS, WHICH NOW ACCOUNT FOR 80 PER- 
CENT OF ALL VALUE ADDED IN MANUFACTURING.  DESPITE 
CHANGES UNDERWAY, SERVICES ARE STILL DOMINATED BY 
PUBLIC CORPORATIONS, WITH BANKING, INSURANCE AND 
PORTIONS OF IMPORT AND EXPORT TRADE THE PROVINCE OF 
PUBLIC SECTOR MONOPOLIES.  REMITTANCES REMAIN AN 
IMPORTANT FACTOR IN NATIONAL INCOME, WITH TRANSFERS 
FROM 100,000 SOMALIS NOW WORKING IN THE GULF ACCOUNT- 
ING IN PAST YEARS FOR UP TO ONE-THIRD OF SOMALIA'S 
TOTAL FOREIGN EXCHANGE EARNINGS.  THE GOVERNMENT IS 
RELATIVELY STABLE.  IN PLACE FOR 15 YEARS, WITH THE 
SECURITY SERVICES UNDER FIRM CONTROL, IT HAS THUS FAR 
WEATHERED SUCCESSFULLY DROUGHTS, WARS AND REFUGEE 
CRISES, AND, MORE RECENTLY, ETHIOPIAN MILITARY 
PRESSURES ON THE BORDER AND ATTACKS ON NORTHERN 
TERRITORIES BY DISSIDENT  GROUPS   BASED IN ETHIOPIA. 
- 
4. RECENT ECONOMIC DEVELOPMENTS:  SOMALIA'S OVERALL 
ECONOMIC PERFORMANCE HAS DETERIORATED BADLY OVER THE 
PAST TWO YEARS AS A SERIES OF BLOWS TO ITS EXTERNAL 
ACCOUNT HAVE COMBINED WITH BURGEONING FISCAL DEFICITS 
TO RECREATE THE LOW GROWTH, HIGH INFLATION ENVIRONMENT 
THAT HAD PREVAILED IN THE LATE 1970S.  WITH EXPORT 
EARNINGS CUT TO LESS THAN HALF THEIR 1982 LEVEL 
(LARGELY AS A RESULT OF SAUDI ARABIA'S 1983 BAN ON 
CATTLE IMPORTS FROM AFRICA) AND FOREIGN AID FINANCING 
DOWN 18 PERCENT FROM ITS 1982 PEAK, SOMALIA CLOSED 
1984 WITH ITS SEVENTH CONSECUTIVE OVERALL BALANCE OF 
PAYMENTS DEFICIT, A NEGATIVE NET FOREIGN ASSETS 
POSITION AND GROSS FOREIGN EXCHANGE RESERVES EQUAL TO 
BARELY SIX WEEKS OF CASH FINANCED IMPORTS.  DEPRESSED 
BY IMPORT SHORTAGES AND WEAK RAINS, REAL GDP GROWTH 
IN 1983 SLIPPED TO ONLY 1 PERCENT AND SEEMS IN 1984 
LIKELY TO HAVE TOTALLED NO MORE THAN 1 TO 2 PERCENT, 
EVEN WITH STRONG RAINS AND RECORD CROP PRODUCTION. 
INFLATION, MEANWHILE, HAS SOARED, RISING FROM AN 
AVERAGE ANNUAL RATE OF 24 PERCENT IN 1982 TO 36 PER- 
CENT IN 1983 AND 93 PERCENT IN 1984. 
- 
5. LOOKING AHEAD TO 1985, PROSPECTS FOR GROWTH AND 
PRICE STABILITY WILL DEPEND UPON THE WEATHER, 
SOMALIA'S SUCCESS IN MUSTERING INTERNATIONAL AID 
SUPPORT FOR ITS PROPOSED IMF STAND-BY ARRANGEMENT, 
AND THE GOVERNMENT'S CAPACITY TO MAINTAIN ITS 
COMMITMENT TO THE ECONOMIC REFORM PROCESS.  IF THE 
POLITICAL COMMITMENT IS FIRM, THE RAINS ADEQUATE, 
AID SUPPORT SUFFICIENT, SOMALIA MAY BE ABLE TO WORK 
THROUGH ITS PROPOSED STAND-BY ARRANGEMENT TOWARDS 
CONSISTENT, EXPORT LED GROWTH.  IF NOT, SOMALIA 
COULD WELL REMAIN TRAPPED WITHIN THE LOW GROWTH, 
HIGH INFLATION VORTEX INTO WHICH IT STUMBLED IN 
1983 AND 1984. 
- 
6. ON THE DEVELOPMENT SIDE, A WORLD BANK SPONSORED 
CONSULTATIVE GROUP MEETING ON SOMALIA IN OCTOBER 
1983 PROVIDED THE STIMULUS FOR AN INITIAL REVIEW OF 
SOMALIA'S PUBLIC INVESTMENT PROGRAM, WHICH THE WORLD 
BANK HAS SINCE FOLLOWED UP WITH STAFF VISITS 
THROUGHOUT 1984.  AS OF THE BEGINNING OF 1985, THE 
RESULT OF THESE REPEATED REVIEWS IS A PUBLIC INVEST- 
MENT PROGRAM LARGELY FREE OF THE WHITE ELEPHANTS 
THAT HAD PLAGUED PREVIOUS DEVELOPMENT PLANS, BUT 
STILL OUT OF PROPORTION TO THE COUNTRY'S REAL FISCAL 
AND PROJECT MANAGEMENT RESOURCES.  RETURNS ON IN- 
VESTMENT HAVE BEEN ABSURDLY LOW OVER THE PAST 13 
YEARS (BELOW 6.7 PERCENT PER ANNUM ON AVERAGE TO JUDGE 
FROM GDP GROWTH AND NATIONAL INVESTMENT RATES) AND 
LIKELY WILL REMAIN LOW IN COMING YEARS, IF MORE CARE- 
FUL CONTROL IS NOT EXERTED OVER THE DISTRIBUTION AND 
USE OF INVESTMENT FUNDS.  A SECOND CONSULTATIVE GROUP 
MEETING NOW TENTATIVELY SCHEDULED FOR OCTOBER 1985 
WILL PROVIDE DONORS WITH A SECOND OPPORTUNITY TO  IN- 
FLUENCE THIS PROCESS. 
- 
7. POLICY FRAMEWORK:  SOMALIA HAS TAKEN SIGNIFICANT 
STEPS OVER THE PAST THREE YEARS TO ESTABLISH THE 
INCENTIVES, OPPORTUNITIES AND FREE OPERATING 
ENVIRONMENT THAT ARE CRUCIAL TO THE SUCCESS OF A 
MARKET-ORIENTED ECONOMIC SYSTEM.  IT HAS ENDED 
PRICE CONTROLS, VIRTUALLY ABOLISHED IMPORT AND EXPORT 
LICENSING, DEVALUED REPEATEDLY (BY A TOTAL OF 83 PER- 
CENT IN FOREIGN CURRENCY TERMS), AND, IN JANUARY 1985, 
ESTABLISHED A DUAL FOREIGN EXCHANGE MARKET WITH A 
FREE AND LEGAL PARALLEL MARKET FOR MOST FOREIGN EX- 
CHANGE TRANSACTIONS.  IT HAS ALSO BOOSTED BANKING 
SYSTEM LOAN AND DEPOSIT RATES BY 8 TO 10 POINTS (IN 
TWO STAGES OVER THREE YEARS), AND COMPLETELY LIBERAL- 
IZED INTERNAL FOODGRAIN MARKETING.  HOWEVER, IT HAS 
NOT BEEN ABLE TO CONSISTENTLY BACK THESE REFORMS 
WITH THE REQUISITE FISCAL AND MONETARY DISCIPLINE. 
REAL INTEREST RATES REMAIN NEGATIVE, AND THE EFFECTS 
OF PAST DEVALUATIONS HAVE BEEN REPEATEDLY WIPED OUT 
BY EXCESSIVE MONETARY EXPANSION.  THE GOVERNMENT HAS 
ALSO BEEN SLOW TO ATTACK INTERNAL MONOPOLY POSITIONS. 
WHILE IT HAS ENDED MOST PUBLIC SECTOR TRADING MONO- 
POLIES, IT HAS LEFT IN PLACE MONOPOLIES IN BANKING, 
INSURANCE, MANUFACTURING, AND OTHER SECTORS OF THE 
ECONOMY.  IT HAS ALSO LEFT IN PLACE AN UNREALISTIC 
(THOUGH LARGELY UNENFORCED) LABOR CODE WMICH OFFICIALLY 
DEPRIVES EMPLOYERS OF THE RIGHT TO HIRE AND FIRE AS 
THEY PLEASE.  OVERALL, THEREFORE, WHILE SOMALIA HAS 
TAKEN MANY OF THE BASIC AND MOST CRITICAL STEPS TOWARDS 
A FREELY OPERATING MARKET ECONOMY OVER THE PAST THREE 
YEARS, IT STILL NEEDS TO COMPLETE THE TASK WITH 
ADJUSTMENTS IN INTERNAL MARKET CONDITIONS, AND IMPROVE- 
MENTS IN GENERAL PUBLIC SECTOR MANAGEMENT. 
- 
8. PERFORMANCE INDICATORS (AVERAGE ANNUAL GROWTH RATES) 
 
-                                  1972-1980   1981-1983 
 
REAL PER CAPITA INCOME (1)          - 2.7         2.4 
MONEY (M1)                           23.0        14.6 
SAVINGS AND TIME DEPOSITS 
-     (QUASI-MONEY)                  25.6        23.0 
TAXES/GDP                            12.7        14.2 
CONSUMER PRICES                      17.7        34.7 
 
-  (1) REAL PER CAPITA GDP AT MARKET PRICES FOR 
-      NON-REFUGEE POPULATION 
- 
9. POLICY INDICATORS 
 
10. MONEY SUPPLY:  FISCAL DEFICITS, ONLY PARTIALLY 
OFFSET BY CONSEQUENTIAL DECLINES IN NET FOREIGN ASSETS, 
HAVE PROVIDED THE MAJOR IMPETUS FOR MONEY SUPPLY 
GROWTH IN SOMALIA OVER THE PAST TWELVE YEARS. 
THE ONLY EXCEPTION TO THIS PATTERN WAS DURING THE 1981 
TO 1983 PERIOD, WHEN, UNDER THE GUIDELINES OF A SERIES 
OF IMF PROGRAMS, NEW NET CREDIT TO THE PRIVATE SECTOR 
ACCOUNTED FOR VIRTUALLY ALL MONEY SUPPLY GROWTH.  WHEN 
SOMALIA'S IMF PROGRAMS LAPSED IN 1984, HOWEVER, 
GOVERNMENT DEMAND FOR CREDIT REASSERTED ITSELF, ALONE 
ACCOUNTING FOR TWO-THIRDS OF A 72 PERCENT INCREASE IN 
NET DOMESTIC CREDIT DURING THE YEAR'S FIRST NINE 
MONTHS. 
- 
11. MONEY SUPPLY DETERMINANTS:  CHANGE IN OUTSTANDING 
-   STOCKS (SO.SH. MILLIONS) 
 
-                                1972-80    1981-1983 
 
M1                                2342.7      1526.3 
NET DOMESTIC CREDIT TO 
-   THE GOVERNMENT                1927.2     -  97.4 
NET DOMESTIC CREDIT TO 
-   PUBLIC ENTERPRISES            1513.0     - 388.1 
NET DOMESTIC CREDIT TO 
-   THE PRIVATE SECTOR             111.0      1866.7 
NET FOREIGN ASSETS               - 156.1     -2372.4 
- 
12. MONETARY POLICY INSTRUMENTS:  SOMALIA OPERATES 
A RELATIVELY SIMPLE FINANCIAL SYSTEM CONSISTING OF 
A CENTRAL BANK, A COMMERCIAL BANK, A DEVELOPMENT 
BANK AND A SINGLE INSURANCE COMPANY, ALL GOVERNMENT 
OWNED.  THE CENTRAL BANK TENDS TO RELY UPON QUANTI- 
TATIVE CONTROLS ON CREDIT ALLOCATIONS TO CONTROL 
THE MONEY SUPPLY.  THE CENTRAL BANK ALSO HAS POWERS 
TO FIX INTEREST RATES AND ADJUST COMMERCIAL BANK 
RESERVE REQUIREMENTS (NOW 10 PERCENT).  HOWEVER, IT 
HAS NOT ADJUSTED RESERVE REQUIREMENTS SINCE 1972, 
AND INTEREST RATES, WHILE ADJUSTED UPWARDS IN RECENT 
YEARS, REMAIN NEGATIVE IN REAL TERMS AND INEFFECTIVE 
IN CONTROLLING THE MONEY SUPPLY.  THERE IS NO MONEY 
MARKET OR OPEN MARKET OPERATIONS IN SOMALIA. 
- 
13. FOREIGN EXCHANGE RATE AND MARKET POLICIES: 
SOMALIA NOW OPERATES A DUAL FOREIGN EXCHANGE 
MARKET.  THE OFFICIAL MARKET, WHICH IS FUNDED 
BY GOVERNMENT GRANTS AND LOANS AND 35 PERCENT OF 
ALL EXPORT EARNINGS, PROVIDES FINANCING FOR ALL 
DEBT AND OTHER OFFICIAL SERVICE PAYMENTS AND FOR 
ALL PUBLIC SECTOR OIL IMPORTS.  THE EXCHANGE RATE 
IN THIS MARKET IS NOW 36:1 (SHILLINGS TO DOLLARS) 
AND IS ADJUSTED UPWARDS MONTHLY BY HALF A SHILLING 
PLUS THE DIFFERENTIAL BETWEEN SOMALIA'S CONSUMER 
PRICE INDEX AND THE WEIGHTED AVERAGE OF THE IN- 
FLATION RATES OF THE FIVE SDR BASKET CURRENCIES. 
- 
14.  ALL OTHER FOREIGN EXCHANGE TRANSACTIONS; I.E., 
ALL TRANSACTIONS NOT SPECIFICALLY ASSIGNED TO THE 
OFFICIAL MARKET, ARE COVERED IN A LEGAL PARALLEL 
MARKET, WHICH IS FUNDED BY PRIVATE TRANSFERS AND 
RETAINED EXPORT EARNINGS (65 PERCENT OF ALL EARN- 
INGS).  ALL TRANSACTIONS IN THIS MARKET TAKE PLACE 
THROUGH FOREIGN AND LOCAL CURRENCY ACCOUNTS OF THE 
COMMERCIAL AND SAVINGS BANK, WHICH CAN BE OPENED 
BY ANY RESIDENT (FOREIGNER OR NATIONAL) OF SOMALIA. 
THE EXCHANGE RATE IN THIS MARKET FLOATS, WITH THE 
COMMERCIAL AND SAVINGS BANK SETTING A DAILY RATE 
FOR ITS OWN TRANSACTIONS AT THE AVERAGE OF THE 
PREVIOUS DAY'S MARKET TRANSACTIONS.  STARTING AT 
75:1 (SHILLINGS TO DOLLARS), THIS BANK RATE HAS 
MOVED TO 82 IN THE THREE WEEKS SINCE THIS NEW 
MARKET WAS ESTABLISHED ON JANUARY 2, 1985, AND WILL 
EVENTUALLY APPROACH THE REAL CURRENT PARALLEL MARKET 
RATE OF 93 TO 95:1. 
- 
15. EXCHANGE CONTROLS IN SOMALIA INCLUDE DIRECT 
RESTRICTIONS ON REMITTANCES OF PROFITS, EARNINGS 
AND CAPITAL, AND A LICENSING REQUIREMENT FOR ALL 
CAPITAL INVESTMENTS.  UNDER SOMALIA'S CURRENT 
INVESTMENT LAW, REGISTERED INVESTMENTS WHICH ARE 
DEEMED "PRODUCTIVE" ARE ENTITLED TO REMIT ANNUALLY 
EARNINGS EQUIVALENT TO 30 PERCENT OF INVESTED 
CAPITAL; "NON-PRODUCTIVE" INVESTMENTS ARE PERMITTED 
NO REMITTANCES FOR THE FIRST SEVEN YEARS, AND 
REMITTANCES ANNUALLY EQUIVALENT TO ONLY 10 PERCENT 
OF INVESTED CAPITAL.  WAGE EARNINGS OF FOREIGN 
WORKERS, SIMILARLY, ARE RESTRICTED TO 50 PERCENT 
OF ANNUAL INCOME.  ALL OF THESE RESTRICTIONS 
REMAIN IN EFFECT UNDER SOMALIA'S NEW DUAL FOREIGN 
EXCHANGE MARKET SYSTEM.  HOWEVER, BECAUSE OF ACCOUNT 
ARRANGEMENTS AT THE COMMERCIAL BANK, THESE RESTRIC- 
TIONS EFFECTIVELY APPLY ONLY TO THOSE FUNDS WHICH 
ORIGINALLY ARRIVED IN COUNTRY AS EXPORT PROCEEDS. 
- 
16. GOVERNMENT BUDGET OPERATIONS:  CENTRAL GOVERN- 
MENT OPERATIONS HAVE ABSORBED A HIGH AND INCREASING 
PERCENTAGE OF GDP IN SOMALIA.  BETWEEN 1972 AND 1980, 
CENTRAL GOVERNMENT EXPENDITURES ABSORBED AN AVERAGE 
OF 22.6 PERCENT OF GDP ANNUALLY, A PERCENTAGE WHICH 
ROSE TO 26.3 PERCENT BETWEEN 1981 AND 1983.  REVENUES, 
HOWEVER, HAVE NOT KEPT PACE, AVERAGING 15.3 PERCENT 
OF GDP IN BOTH PERIODS.  DEFICITS IN BOTH PERIODS 
WERE FINANCED PRIMARILY BY FOREIGN GRANTS AND LOANS. 
IN THE EARLIER PERIOD, HOWEVER, THIS FOREIGN 
FINANCING WAS SUPPLEMENTED BY SIZEABLE BANKING 
SYSTEM CREDITS, A REQUIREMENT THAT WAS ELIMINATED 
BETWEEN 1981 AND 1983 BEFORE REAPPEARING IN 1984. 
- 
17. CENTRAL GOVERNMENT BUDGET OPERATIONS (AS A 
-   PERCENT OF GDP) 
 
-                                1972-80     1981-83 
 
EXPENDITURES                       22.6        26.3 
REVENUE                            15.3        15.3 
DEFICIT                             7.3        11.0 
 
18. CENTRAL GOVERNMENT DEFICIT FINANCING BY 
-   SOURCE (AS A PERCENT OF TOTAL DEFICIT) 
 
-                                1972-80     1981-83 
 
DEFICIT                           100.0       100.0 
DOMESTIC FINANCING                 38.0      -  2.0 
-   BANKING SYSTEM                 38.0      -  1.5 
-   OTHER                           -        -   .5 
 
FOREIGN FINANCING                  62.0       103.1 
-   GRANTS                         17.4        40.7 
-   LOANS                          44.6        62.4 
 
DISCREPANCY                         -        -  1.1 
- 
19. TAXATION:  SOMALIA RAISES THE VAST MAJORITY 
OF ITS CENTRAL GOVERNMENT REVENUE FROM TAXES ON 
TRADE AND TRANSACTIONS.  ACCORDING TO PRELIMINARY 
GOVERNMENT ESTIMATES, TAXES ON INCOME AND PROFIT 
IN 1983 ACCOUNTED FOR ONLY 4 PERCENT OF TOTAL 
REVENUE; PROPERTY TAXES CONTRIBUTED 5 PERCENT; WHILE 
LEVIES ON PUBLIC ENTERPRISES AND DEPARTMENTAL 
SURPLUSES ACCOUNTED FOR 17 PERCENT.  THE BALANCE 
WAS COVERED BY TAXES ON IMPORTS (51 PERCENT OF TOTAL 
REVENUE), EXPORTS (3 PERCENT), EXCISE TAXES (12 
PERCENT) AND STAMP TAXES (6.8 PERCENT).  RATES 
VARIED BY SOURCE.  ON PERSONAL INCOME EARNED FROM 
EMPLOYMENT, TAX RATES RANGED FROM ZERO FOR EARNINGS 
LESS THAN US DOLS 6  PER MONTH TO 18.9 PERCENT FOR 
EARNINGS ABOVE US DOLS 42 PER MONTH.  FOR OTHER 
PERSONAL INCOME, RATES RANGE FROM ZERO FOR EARNINGS 
LESS THAN US DOLS 67 PER YEAR TO 30 PERCENT FOR EARN- 
INGS ABOVE US DOLS 835 PER YEAR.  PRIVATE CORPORATE 
PROFITS ARE TAXED AT A FLAT 35 PERCENT RATE. 
SPECIFIC EXCISE TAXES ARE LEVIED ON SUGAR, TOBACCO, 
MATCHES, BEVERAGES, MINERAL WATER, SOAP AND SHAMPOO; 
A GENERAL 5 PERCENT SALES TAX HAS ALSO BEEN DEVELOPED 
WHICH WILL APPLY TO ALL BUT ESSENTIAL GOODS. 
CUSTOMS DUTIES AVERAGE 60-65 PERCENT OF THE VALUE OF 
DUTIABLE MERCHANDISE AND ARE APPLIED AT RATES THAT 
RANGE FROM ZERO TO OVER 100 PERCENT ON 120 PERCENT 
OF THE L/C VALUE OF IMPORTED COMMODITIES VALUED 
AT AN ADMINISTRATIVE RATE OF 60:1 (SHILLINGS TO 
DOLLARS).  EXPORT TAXES ARE APPLIED ON ALL MAJOR 
EXPORTS AT RATES RANGING UP TO 30 PERCENT OF FOB 
VALUE.  ADMINISTRATIVE AND STATISTICAL TAXES ARE 
ALSO APPLIED AT A 10 PERCENT AD VALOREM RATE TO ALL 
IMPORTS AND EXPORTS.  TAXES ON PUBLIC ENTERPRISES 
INCLUDE A TURNOVER TAX (APPLIED AT A RATE OF 50 
PERCENT ON NET PROFIT), A PROFIT TAX (APPLIED AT A 
35 PERCENT RATE AFTER DEDUCTION OF THE TURNOVER TAX) 
AND A 50 PERCENT GOVERNMENT SHARE IN ANNUAL DEPRECIA- 
TION ALLOWANCES. 
- 
20. PRICING POLICIES:  CONSUMER PRICES:  SOMALIA 
OFFICIALLY ENDED ALL CONSUMER PRICE CONTROLS IN 
JANUARY 1985.  OIL PRODUCTS WHICH ARE IMPORTED BY 
A GOVERNMENT TRADING AGENCY OPERATING AT THE OFFICIAL 
(36:1) EXCHANGE RATE, ARE STILL AVAILABLE AT WHAT 
AMOUNTS TO SUBSIDIZED PRICES (E.G., 17 SHILLINGS PER 
LITER OF GASOLINE).  ALL OTHER PRICES, HOWEVER, 
INCLUDING PRICES FOR ELECTRICITY AND WATER, HAVE 
BEEN ADJUSTED TO REFLECT FULL COSTS AT THE PARALLEL 
MARKET RATE OF EXCHANGE. 
- 
21. PRODUCER PRICES:  AGRICULTURAL MARKETS AND PRICES 
WERE LARGELY DECONTROLLED BY SOMALIA IN JANUARY 1984, 
AND, IN THE YEAR SINCE, BASIC FOOD PRICES HAVE RISEN 
TO MARKET RATES.  THE AGRICULTURAL DEVELOPMENT 
CORPORATION, THE GOVERNMENT TRADING AGENCY WHICH 
PREVIOUSLY HELD A MONOPSONY ON ALL GRAIN PURCHASES 
IN SOMALIA, STILL HOLDS THE LEGAL RIGHT TO PURCHASE 
UP TO 5 PERCENT OF EACH YEAR'S CROP, BUT HAS NOT 
EXERCISED THAT RIGHT IN RECENT YEARS.  BANANA EXPORTS 
FROM SOMALIA ARE ENTIRELY UNDER THE CONTROL OF A 
PRIVATE/PUBLIC JOINT VENTURE, WHICH, OBLIGED IN THE 
PAST TO OPERATE AT THE OFFICIAL EXCHANGE RATE, HAS 
NOT ALWAYS OFFERED COMPETITIVE PRICES FOR EXPORT 
QUALITY FRUIT.  NOW FREE TO OPERATE AT THE PARALLEL 
MARKET RATE OF EXCHANGE, IT SHOULD BE ABLE TO OFFER 
COMPETITIVE PRICES IN THE FUTURE. 
- 
22. STATE ENTERPRISE PRICES:  THE PRICE DECONTROL 
INTRODUCED IN JANUARY 1985 HAS LEFT ALL PUBLIC 
ENTERPRISES WITH FULL FREEDOM TO SET INPUT AND 
OUTPUT PRICES AT LEVELS THAT WILL FULLY COVER 
COSTS.  MANY, HOWEVER, ENJOY MONOPOLY POSITIONS IN 
THE ECONOMY, AND HAVE NOT BEEN FORCED BY COMPETITIVE 
PRESSURES OR PRICE DEVELOPMENTS ELSEWHERE IN THE 
ECONOMY TO MOVE THEIR PRICES TO ECONOMIC LEVELS.  IN 
THIS CLASS OF PUBLIC AND PRIVATE MONOPOLIES ARE THE 
COMMERCIAL AND SAVINGS BANK; THE STATE INSURANCE 
COMPANY OF SOMALIA; THE NATIONAL PETROLEUM AGENCY, 
WHICH CONTROLS OIL IMPORTS; THE SOMALI COOPERATIVE 
MOVEMENT,WHICH CONTROLS IN-COUNTRY OIL DISTRIBUTION 
AND, THROUGH THE FRANKINCENSE AND MYRRH AGENCY, EX- 
PORTS OF AROMATIC GUMS; THE SOMALI LEATHER AGENCY, 
WHICH CONTROLS EXPORTS OF HIDES AND SKINS, ASPIMA, 
WHICH CONTROLS IMPORTS OF VETERINARY DRUGS; 
SOMALFRUTTA, WHICH CONTROLS EXPORTS OF BANANAS; 
THE SOMALI SHIPPING AGENCY, AND THE SOMALI CLEARING 
AND FORWARDING AGENCIES. 
- 
23. SAVINGS AND INVESTMENT POLICIES:  THE PUBLIC 
ENTERPRISES:  THERE ARE NOW 51 PARASTATAL CORPORATIONS 
OPERATING IN SOMALIA, INCLUDING FIVE FINANCIAL, 33 
NON-FINANCIAL AND EIGHT NON-COMMERCIAL PUBLIC ENTER- 
PRISES, WHICH TOGETHER DOMINATE MOST BANKING, 
INSURANCE, AND MANUFACTURING INDUSTRIES IN SOMALIA. 
DURING THE 1970'S THESE ENTERPRISES WERE NOT TREATED 
PRIMARILY AS PROFIT-MAKING COMMERCIAL OPERATIONS, 
BUT OFTEN AS SOURCES OF FUNDS FOR THE CENTRAL 
GOVERNMENT AND INSTRUMENTS FOR THE PURSUIT OF SOCIAL 
WELFARE POLICIES.  SURPLUSES WERE TAXED AWAY BY HIGH 
PROFIT TAXES AND GOVERNMENT CLAIMS ON DEPRECIATION 
ALLOWANCES; WAGES AND EMPLOYMENT WERE DISTORTED BY 
CENTRAL GOVERNMENT POLICIES, AND PRICES FOR BOTH INPUTS 
AND OUTPUTS MAINTAINED AT UNREALISTICALLY LOW LEVELS. 
BEGINNING IN 1981, SOMALIA HAS TAKEN SOME STEPS TO 
ADDRESS THESE PROBLEMS.  THREE PUBLIC ENTERPRISES 
HAVE BEEN CLOSED; OTHERS HAVE BEEN PROVIDED WITH 
FOREIGN MANAGERIAL ASSISTANCE.  THE REST ARE BEING 
REVIEWED TO DETERMINE WHICH TO RETAIN AS SERVICE 
INSTITUTIONS ON PUBLIC SUBSIDIES, WHICH TO DIVEST 
OR CLOSE, AND WHICH TO ESTABLISH AS COMMERCIAL 
ENTERPRISES IN COMPETITIVE MARKETS.  DECISIONS HAVE 
ALSO BEEN TAKEN TO GRANT ALL PUBLIC ENTERPRISES 
AUTONOMY IN REGARD TO WAGE, EMPLOYMENT AND PRICING 
DECISIONS, AND WHERE POSSIBLE, TO ELIMINATE THE 
REMAINING PUBLIC SECTOR MONOPOLIES IN TRADE, BANKING 
AND SERVICES.  PROGRESS IN IMPLEMENTING THESE DECISIONS, 
HOWEVER HAS BEEN SLOW. 
- 
24. PRIVATE INVESTMENT:  INCENTIVES:  SOMALIA'S 
CURRENT INVESTMENT LAW OFFERS NEW INVESTMENTS TAX 
HOLIDAYS ON ALL INCOME, IMPORT, EXCISE AND PROPERTY 
TAXES FOR PERIODS OF UP TO FIVE YEARS.  IT ALSO 
GUARANTEES REMITTANCES AT THE RATES OUTLINED ABOVE. 
IN ADDITION, J  FHE NEW FOREIGN EXCHANGE MARKET 
ARRANGEMENTS, FACILITIES FOR REMITTANCES ABOVE THE 
RATES DEFINED IN THE LAW ARE AVAILABLE IN THE NEW 
LEGAL PARALLEL MARKET.  SOMALIA HAS NEGOTIATED A 
BILATERAL INVESTMENT TREATY WITH THE FEDERAL REPUBLIC 
OF GERMANY, WHICH PROVIDES FOR MOST FAVORED NATION 
OR NATIONAL TREATMENT FOR GERMAN INVESTORS, PROMPT 
AND ADEQUATE COMPENSATION IN CASE OF EXPROPRIATION, 
AND FREE TRANSFER OF CAPITAL, DIVIDENDS, INTEREST 
AND EARNINGS.  IT ALSO HAS UNDER CONSIDERATION TWO 
DRAFT BILATERAL INVESTMENT TREATIES WITH THE UNITED 
STATES AND GREAT BRITAIN. 
- 
25. DISINCENTIVES:  DISINCENTIVES TO PRIVATE INVEST- 
MENT INCLUDE THE COUNTRY'S GENERAL INFRASTRUCTURAL AND 
INSTITUTIONAL WEAKNESSES, THE CONTINUING THREAT OF 
POLITICAL OR ECONOMIC INSTABILITY, THE PRE-EMPTION 
OF INVESTMENT OPPORTUNITIES BY PUBLIC AND PRIVATE 
MONOPOLIES, A CONTINUING UNCERTAINTY REGARDING 
MARKET FREEDOMS, THE CONTINUING RESTRICTIONS ON 
WAGE AND CAPITAL REMITTANCES, THE LACK OF A WELL 
DEFINED BODY OF COMPANY AND COMMERCIAL LAW, AND AN 
ONEROUS (THOUGH UNENFORCED) LABOR CODE WHICH OFFICIALLY 
DEPRIVES THE EMPLOYER OF THE RIGHT TO HIRE AND FIRE 
FREELY, MANDATES AN UNECONOMICALLY HIGH LEVEL OF WORKER 
BENEFITS, AND RESTRICTS THE EMPLOYMENT OF FOREIGN 
NATIONALS.  A REVIEW OF INVESTMENT LAW NOW UNDER WAY 
MAY ELIMINATE SOME OF THE RESTRICTIONS NOW IMPOSED 
ON REMITTANCES, AND PROVIDE A FULLER SET OF PROPERTY 
RIGHTS FOR NEW INVESTORS. 
- 
26. LEVELS OF PUBLIC AND PRIVATE INVESTMENT:  THERE 
HAVE BEEN WIDE FLUCTUATIONS IN PRIVATE SECTOR 
SAVINGS AND INVESTMENT OVER THE PAST 13 YEARS, AS 
WEATHER INDUCED FLUCTUATIONS IN INVENTORY ACCUMULATION 
IN THE ALL-IMPORTANT LIVESTOCK SECTOR OVERWHELMED 
RELATIVELY LOW LEVELS OF PRIVATE SECTOR FIXED CAPITAL 
FORMATION.  PUBLIC SECTOR SAVINGS AND INVESTMENT HAVE 
ALSO VARIED WIDELY AS WARS, DROUGHTS AND REFUGEE 
CRISES HAVE REPEATEDLY SWELLED RECURRENT EXPENDITURES. 
OVERALL, DOMESTIC INVESTMENT TOTALLED APPROXIMATELY 
18 PERCENT OF GDP (10 PERCENT PUBLIC, 8 PERCENT PRIVATE) 
BETWEEN 1972 AND 1980, RISING TO 21 PERCENT (10 PERCENT 
PUBLIC, 11 PERCENT PRIVATE) BETWEEN 1981 AND 1983. 
SAVINGS LAGGED, TOTALLING ONLY 3 PERCENT OF GDP (MINUS 
7 PERCENT PUBLIC, 10 PERCENT PRIVATE) IN 1972 TO 1980, 
AND 4 PERCENT OF GDP (MINUS 10 PERCENT PUBLIC, 14 
PERCENT PRIVATE) BETWEEN 1981 AND 1983.  THE BALANCE 
OF INVESTMENT EXPENDITURES WERE COVERED BY FOREIGN 
GRANTS AND LOANS, AND REMITTANCES, WHICH TOGETHER 
AVERAGED 15 PERCENT OF GDP BETWEEN 1972 AND 1980, 
AND 18 PERCENT OF GDP BETWEEN 1981 AND 1983.  FOR 1984 
TO 1986, SOMALIA HAS PROPOSED A PUBLIC INVESTMENT 
PROGRAM WHICH WOULD RAISE NATIONAL INVESTMENT TO 23 
PERCENT OF GDP (16 PERCENT PUBLIC AND 7 PERCENT 
PRIVATE) FINANCED ENTIRELY BY FOREIGN GRANTS AND LOANS 
(25.5 PERCENT OF GDP).  WITH FOREIGN FINANCING AND 
THE PUBLIC SECTOR'S OWN ABSORPTIVE CAPACITY SETTING 
LIMITS TO PUBLIC SECTOR ACTIVITIES, HOWEVER, ACTUAL 
PUBLIC SECTOR INVESTMENT TOTALLED ONLY ABOUT 9 PERCENT 
OF GDP IN 1984 - A RATE THAT LIKELY WILL HOLD FOR THE 
NEXT TWO TO THREE YEARS. 
 
- 
27. SAVINGS AND INVESTMENT (AS SHARES OF GDP): 
 
-                                1972-80     1981-83 
 
INVESTMENT                         18.4        21.1 
 
-   PUBLIC                         10.0        10.1 
-   PRIVATE                         8.4        11.0 
 
DOMESTIC SAVINGS                    3.0         3.6 
 
-   PUBLIC                       -  7.2      - 10.2 
-   PRIVATE                        10.2        13.8 
 
REMITTANCES                         1.6         1.8 
 
FOREIGN GRANTS AND LOANS           13.8        15.7 
- 
28. AID ASSISTANCE:  DISBURSEMENTS OF GRANTS AND 
LOANS TO SOMALIA FROM ALL OFFICIAL SOURCES FOR 
ALL USES (REFUGEE, DEVELOPMENT AND BALANCE OF 
PAYMENTS ASSISTANCE) HAS INCREASED RAPIDLY OVER 
THE PAST NINE YEARS, RISING FROM SLIGHTLY OVER 
US DOLS 120 MILLION IN 1975 TO APPROXIMATELY US 
DOLS 300 MILLION IN 1983, BEFORE DROPPING OFF 
SLIGHTLY IN 1984 TO APPROXIMATELY US DOLS 260 
MILLION.  GRANTS ACCOUNTED FOR A GRADUALLY IN- 
CREASING PROPORTION OF THIS ASSISTANCE (ABOVE 50 
PERCENT IN 1984), AND LOANS, INCLUDING LOANS 
FROM THE IMF AND ARAB MONETARY FUND, FOR THE 
BALANCE.  MAJOR DONORS AND LENDERS INCLUDED SAUDI 
ARABIA, KUWAIT, THE UNITED STATES, ITALY, THE 
FEDERAL REPUBLIC OF GERMANY, THE EEC, THE IBRD, 
THE IMF, THE ARAB FUND FOR ECONOMIC DEVELOPMENT AND 
THE ISLAMIC DEVELOPMENT BANK.  FOR 1985 AND 1986, 
SOMALIA HAS PROJECTED FURTHER GRANT AND LOAN DIS- 
BURSEMENTS OF APPROXIMATELY US DOLS 900 MILLION, 
THOUGH ACTUAL DISBURSEMENTS MAY FALL SOMEWHAT 
SHORT OF THIS TARGET. 
- 
29. PARALLELING THE RAPID INCREASE IN AID DIS- 
BURSEMENTS HAS BEEN AN EQUALLY RAPID RISE IN SOMALIA'S 
EXTERNAL DEBT.  BETWEEN YEAR END 1979 AND YEAR END 
1984, SOMALIA'S TOTAL EXTERNAL DEBT ROSE TO APPROX- 
IMATELY US DOLS 1445 MILLION, UP US DOLS 848 MILLION 
FROM THE US DOLS 597 MILLION LEVEL WHICH HAD PRE- 
VAILED AT THE CLOSE OF 1979.  THANKS TO EXTENSIVE 
REFINANCING ARRANGEMENTS, (WITH MIDDLE EASTERN 
CREDITORS, IN PARTICULAR), OVERALL DEBT SERVICE 
PAYMENTS HAVE REMAINED MANAGEABLE (50 PERCENT OF 
GOODS AND SERVICE EXPORTS IN 1984).  WITHOUT 
FURTHER RESCHEDULINGS, HOWEVER, DEBT SERVICE PAY- 
MENTS WILL RISE TO, AND MAY EXCEED, THE TOTAL OF 
SOMALIA'S GOODS AND SERVICE EXPORTS OVER THE NEXT 
THREE YEARS. 
- 
30. SOURCES:  THE PRIMARY SOURCES USED IN COMPILING 
THIS REPORT WERE THE WORLD BANK'S PRELIMINARY 
ESTIMATES OF NATIONAL ACCOUNT AGGREGATES PUBLISHED 
IN AUGUST 1984, THE IMF'S REVIEW OF SOMALIA'S STAND- 
BY ARRANGEMENT PUBLISHED IN APRIL 1984, THE IMF'S 
DRAFT FINANCIAL PROGRAM FOR SOMALIA'S PROPOSED 
1985 STAND-BY ARRANGEMENT, WHICH WAS DEVELOPED IN 
NOVEMBER 1984, AND THE IMF'S GOVERNMENT FINANCIAL 
STATISTICS YEARBOOK FOR 1983, INTERNATIONAL FINANCIAL 
STATISTICS YEARBOOK FOR 1984, AND REPORT ON EX- 
CHANGE ARRANGEMENTS AND EXCHANGE RESTRICTIONS FOR 
1984.  THE BALANCE OF PAYMENTS AND CENTRAL GOVERNMENT 
FISCAL DATA FOR 1983 AND 1984 ARE PRELIMINARY.  THE 
MONETARY DATA IS RELIABLE THROUGH THE CLOSE OF 1983. 
THE NATIONAL ACCOUNTS DATA ARE RELIABLE THROUGH THE 
CLOSE OF 1982. 
 
BRIDGES