Credit mirsad sarajlic/iStock by Getty Images
Credit mirsad sarajlic/iStock by Getty Images
Fiscal risks in Somalia are massive .. they include droughts, floods, and desert locusts, and highly uncertain external grants ….
Credit mirsad sarajlic/iStock by Getty Images
Credit mirsad sarajlic/iStock by Getty Images
Fiscal risks in Somalia are massive .. they include droughts, floods, and desert locusts, and highly uncertain external grants ….
Fiscal risks are considered as any deviations in fiscal outcomes compared to the government’s fiscal and budgetary forecasts or projections. Addressing such risks periodically is important to avoid further government obligations, public financing difficulties, increases in public debt and sometimes prolonged fiscal crises.
The crises that have occurred in Somalia following the collapse of the republic in 1991 led to a loss of institutional capacity and poor management of public finances. Moreover, Somalia has become officially dollarized, which means that the role of the state as lender of the last resort is no longer applicable.
Fiscal policy thus became the only regulatory option available for the government to manage the economy. However, the lack of institutional capacity and severe economic fragility accompanied by poor fiscal risk management practices have escalated the policy constraints across all spheres of governance. The country has a federal government and five member states (including Puntland), together with many subnational governments.
Three types of fiscal risk may be identified – macroeconomic risks, institutional risks, and specific risks. Macroeconomic risks are those that are associated with errors in forecasting and their implications for the budget. The federal government of Somalia and the member states are experiencing many macroeconomic risk factors including balance of payments deficits linked to dollarization, currency outflows, and limited capacity to control inflation due to the country’s high dependency on foreign commodities.
Institutional risks are related to the ministry of finance’s approaches in both federal government and member states to risk management, policy formulation and institutional capacity. Across the different levels of government in Somalia fiscal risk management practices remain unconventional. Fiscal policy frameworks, formulation tools and forecasting methods do not follow a strategic approach to ensure that the impact of new policies are examined before they are officially introduced.
Specific risks are another important category of fiscal risk which occur as unexpected events such as droughts, floods or desert locusts impact the country, and the costs need to be borne by the federal government or member states. Another source of risk is the high degree of uncertainty associated with grants from international development organizations, and financial transfers from the federal government to the member states. These risks can result in large revenue shortfalls, an unplanned increase in the deficit or debt levels, and potentially a collapse of the government’s fiscal policy. The chart below indicates the likelihood and magnitude of these risks.
Somalia - Fiscal Risk Assessment Framework (Puntland State)
In response to these concerns, we recommend some actions that will help the respective institutions to better manage fiscal risks across the federal government and member states.
