Credit iStock.com/Elif Bayaktar
Credit iStock.com/Elif Bayaktar
Credit iStock.com/Elif Bayaktar
Credit iStock.com/Elif Bayaktar
The analogy of the human body illustrates the importance of fiscal management; blood transports essential nutrients, while the heart circulates that blood. Similarly, the Ministry of Finance functions as the heart of the public sector, with money serving as the blood that enables government ministries and agencies to fulfill their duties effectively.
In Somalia, the economy has become highly dollarized due to currency devaluations, limiting monetary authority effectiveness. Consequently, fiscal policy has emerged as the primary regulatory tool for the government, addressing urgent public service needs and raising necessary funds.
Two critical issues arise in this context, First, it is essential to ensure the health and capacity of the Ministry of Finance so it can function effectively as the heart of the economy. Second, there is a need to balance the dual objectives of fiscal policy, addressing the trade-off between the regulatory objective and other objectives of fiscal policy like raising revenues and delivering public goods and services. The conditions under which the Ministry operates significantly shape its actions, making the adoption of a robust and comprehensive macro-fiscal analysis imperative.
This analysis has already established performance-oriented macro-fiscal indicators, such as the tax-to-GDP ratio, providing a baseline for policymaking and facilitating performance tracking. The Federal Ministry of Finance has strengthened fiscal discipline. However, developing a fiscal risk framework enhance policy resilience while periodic technical reports throughout all phases of fiscal policy improve transparency, which is vital for public trust. This approach also ensures consistency among fiscal policies, macroeconomic frameworks and medium-term development goals.
According to data from the National Bureau of Statistics, Somalia’s GDP reached $ 10,969 billion in fiscal year 2023, while tax revenue reported to by Federal Ministry of Finance was $ 189.9 million, resulting in a tax to GDP ratio of 2%. Some Federal Member States (FMS) like Puntland, have a tax-to-GDP ratio of around 2.6% while other FMS are expected to have similarly low ratios. This positions Somalia among the lowest in Africa in terms of tax revenue. In fiscal year 2024, it was estimated that more than 60% of the Federal Government of Somalia’s (FGS) budget would rely on grants from abroad, raising concerns about fiscal sustainability. Nonetheless, Somalia’s public debt-to-GDP ratio has significantly decreased from 64% in 2018 to 6.4% in 2023, according to the African Development Bank’s Somali Economic Outlook.
While the country is making progress in certain dimensions, it is simultaneously confronting critical fiscal challenges. There is no doubt about the need to adopt effective fiscal management tools. These practices collectively enable informed and prudent policy decisions that effectively address concerns related to the efficacy of fiscal policy. However, a comprehensive macro-fiscal analysis requires various analytical tools, including forecasting, performance monitoring, risk assessment and scenario analysis which simultaneously involve the use of data packages and data analytics. Also, a solid background in macroeconomics and public financial management is essential for undertaking these critical tasks.
Ultimately, the fiscal authorities must strengthen their macro-fiscal office and recognize it as the driving force behind fiscal policy. This recognition should apply not only to the fiscal authorities at both Federal and state level but also local governments. Adopting a data-driven approach and enhancing the capacity of fiscal institutions can pave the way for more effective governance and improved fiscal outcomes, ultimately contributing to the country’s economic stability and growth.
