Somalia’s Economy Projected to Grow at 3.1% in 2023 Amid Policy Reforms and Improved Weather

The latest Somalia Economic Update indicates a modest medium-term growth outlook, with projections of 3.7 percent in 2024 and 3.9 percent in 2025.

Somalia’s economy is expected to grow at 3.1 percent in 2023, up from 2.4 percent in 2022. This growth rebound is driven by improved weather conditions and policy reforms aimed at reaching the Heavily Indebted Poor Countries (HIPC) Completion Point.

The latest Somalia Economic Update indicates a modest medium-term growth outlook, with projections of 3.7 percent in 2024 and 3.9 percent in 2025. Despite facing significant risks such as persistent climatic shocks, security threats, and global economic uncertainties, the Federal Government of Somalia (FGS) continues to maintain broad-based fiscal stability. Inflationary pressures have eased, thanks to declining food prices, favorable weather, and a decrease in global commodity prices.

“Addressing climate challenges and risks is essential for sustainable and resilient economic growth,” said Kristina Svensson, World Bank Country Manager for Somalia. “The Government of Somalia must support sustained and long-term growth anchored on macroeconomic stability, broad-based structural reforms, and resilience to climate change across the economy.”

Growth has been bolstered by favorable rains in 2023, leading to a stronger-than-expected rebound in the agriculture sector. The livestock sector also recovered swiftly, with a significant increase in livestock exports. Additionally, the FGS recorded robust growth in domestic revenue, although it remains insufficient to meet the rising expenditure needs. Improved performance by Somalia’s banks indicates increasing confidence in the financial sector.

The special focus section of the economic update explores how climate action can drive economic growth in Somalia. The report emphasizes the need for Somalia to preempt acute climate disasters by investing in resilience and preparedness rather than relying on humanitarian aid. This requires investments in disaster risk management, social protection, and more resilient rural livelihood systems.

The report projects modest medium-term growth anchored on continued political stability and reduced security risks. To maintain this growth path, the government needs to gradually scale up public spending in energy, transportation, education, and health sectors. Prospects will also depend on macroeconomic stability and government policies.

External trade is expected to improve with continued favorable weather and a stronger global environment. Financial sector reforms and institutional capacity building are anticipated to boost confidence, integrity, and financial deepening. Reforms in tax policies and administration are expected to mobilize additional domestic revenue. Increased domestic revenues will allow for greater public investment and social services spending, with the wage bill and expenditures on goods and services driving two-thirds of the 2024 budget. Maintaining low inflation and supporting household incomes will be crucial.

“Somalia’s economic outlook remains positive, with economic growth set to accelerate, albeit at a modest pace,” said Abdoulaye Ouedraogo, World Bank Economist and author of the report. “Completing the HIPC process and joining the East African Community should boost investor confidence and support regional integration. Economic reforms and increased public investment are also expected to attract foreign direct investment, encouraging broader private sector activity and investment.”

The report offers policy recommendations for the post-HIPC environment. It suggests managing budget deficits through prudent fiscal policies, strengthening domestic resource mobilization, containing the wage bill and security spending, and advancing public finance management reforms. It is imperative for the government to further strengthen debt management legislation and prioritize concessional financing sources. Advancing discussions on federalism can enhance state stability, improving the overall business environment and strengthening public service delivery. The report cautions against overreliance on external grants, which could jeopardize macroeconomic stability if disrupted, and warns of the substantial risks of re-accumulating debt arrears.