IMF staff completes Article IV discussions and reaches staff-level agreement on second review under extended lending program

IMF staff completes Article IV discussions and reaches staff-level agreement on second review under extended lending program

October 31, 2024

Press releases at the end of the mission include statements by IMF staff teams conveying preliminary findings after the country visit. The views expressed in this statement are those of IMF staff and do not necessarily reflect the views of the IMF Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

• IMF staff and the Somali authorities have reached agreement on staffing levels for the second review under the Extended Credit Facility (ECF). Program implementation was high, demonstrating the authorities’ unwavering commitment to macroeconomic stability and strengthening institutional capacity and frameworks.
• Real GDP growth was raised to 4 percent for 2024 and 2025, driven by strong exports and remittances. However, risks remain high, particularly due to regional and internal security developments, commodity prices and climate shocks.
• Sustained reform efforts are needed to create the conditions for greater resilience, poverty reduction and inclusive growth. This includes strengthening fiscal capacity and public financial management, promoting financial deepening and improving governance.

Washington, DC: A team of International Monetary Fund (IMF) staff led by Ms. Laura Jaramillo held discussions with the Somali authorities in Istanbul and Washington on the 2024 Article IV consultations and reached staff-level agreement on a second review of the Extended Credit Line (ECF) agreement, which was approved by the IMF Executive Board in December 2023 (Press release No. 23/463). This agreement is subject to approval by the IMF Executive Board.

At the end of the discussions, Ms. Jaramillo made the following statement:

“Somalia’s real GDP growth forecast has improved, although challenges and risks remain significant. The positive trends in agriculture, exports and remittances in 2024 are expected to continue in 2025. As a result, real GDP growth was raised to 4 percent in 2024 and 2025, an average of ¼ percentage point higher than previous projections. Inflation is expected to continue to fall to 4.5 percent by the end of 2024, although at a slower pace than previously forecast. Despite the security challenges, the Somali government remains steadfast in its fight against terrorism and continues to work with international partners to ensure a successful transition from the current African Union Transitional Mission to the new force by January 2025. The most immediate risks for the future are climate change. upheavals, domestic and regional security developments, lower global growth and higher commodity prices.

“The government continues to focus on increasing domestic revenues, aiming to fully cover operating expenses with domestic revenues by 2027, as well as spending on higher education and health care. Fiscal performance in 2024 is in line with expectations, and the overall deficit for the year is expected to be 0.2 percent of GDP. The draft budget for 2025 projects domestic revenues at 3.3 percent of GDP and a general budget deficit of 0.2 percent of GDP, assuming continued access to grant funding, which remains critical for Somalia.

“The authorities recognize the importance of achieving stable progress in fiscal reforms. Key revenue measures — according to the recently released Medium-Term Revenue Roadmap — include the ongoing modernization of customs, a new income tax law and stronger sales and income taxes. The management of public finances continues to be strengthened, and significant progress has been made in ensuring the integrity of the wage fund. Reforms to improve debt management and capacity are also progressing well. Measures are also being taken to complete the legislative framework for extractive industries, including to increase transparency and accountability.

“The Central Bank of Somalia (CBS) is promoting institutional governance and financial sector reforms. The main focus is on promoting financial deepening, including by improving the legislative and supervisory framework, improving the quality of regulatory data and increasing the technical capacity of the CBS. Efforts continue to strengthen the framework for combating money laundering and terrorist financing to meet international standards.

“The authorities intend to re-introduce the Somali shilling (SOS) and introduce a currency board system. The new SOS notes will provide an important liquidity function, simplifying payments for small value transactions, and will promote financial accessibility for the most vulnerable sections of the population. To ensure a stable and predictable political environment to build credibility for SOS in Somalia, the authorities are also beginning preparations to introduce a currency board regime with IMF capacity building support. Implementation of these reforms will take approximately 18-24 months once the prerequisites are in place, including the necessary external funding.

“The authorities are also committed to promoting steps to promote inclusive growth and reduce poverty, improve resilience to climate shocks and strengthen trade integration. Increasing human capital by raising the educational attainment of Somali children and closing gender gaps in education can yield significant growth dividends. Increasing resilience to climate shocks and strengthening food security is also a priority. Given Somalia’s very limited resources, financial and technical assistance from international partners remains critical. The East African Community presents significant opportunities, challenges and risks for Somalia, so the integration process needs to be carefully managed.

“The mission would like to express its gratitude to the Somali authorities for the constructive and fruitful discussions. Meetings were held with the Minister of Finance, the Minister of Petroleum, the head of the CBS, other government officials, development partners and representatives of the private sector.”