The largely ungoverned (by state institutions) Somali economic model is exceptional in its form and functioning, owing not only to the protracted civil war but also to a legacy of state exploitation under Siad Barre and antipathy towards central authority.[56] As highlighted elsewhere, the Somali economy is also quite exceptional in its reliance on its diaspora communities for remittances and skilled employees. Although weak governance and remittances remain defining features of the Somali economy, significant economic growth, improvements in key infrastructure and rapid urbanisation have changed dynamics in both markets and politics. In order to understand the role of SMEs in the Somali context and the COVID-induced shock, this chapter gives a high-level overview of market dynamics and provides an overview of the way COVID-19 has affected Somalia and Somaliland.

3.1 Business environment

While Somalia has outperformed a number of other fragile states (such as South Sudan, Yemen and Afghanistan) and in terms of real GDP growth since 2015, it has ranked at or near the bottom of business environment indices trailing behind those same countries.[57] Somalia’s poor ranking reflects the weak or absent formal and central governance felt in most areas. Most sectors of the economy are virtually unregulated, domestically generated government revenues are mostly limited to airport and port fees supplemented with poorly enforced tax collection, while the national court system is frequently considered incapable of fairly resolving business disputes.[58] Access to credit is severely constrained as the financial sector is poorly regulated, and relevant infrastructure is often expensive to access as it is provided by private suppliers (if available at all) (e.g. electricity).[59] Although the Federal Government of Somalia (FGS) and the government of Somaliland are attempting to increase their roles as regulators, neither have been able to break the clientelist ties between businesses and politicians as well as civil servants.[60] Instead, the FGS has remained noted for its gatekeeper role in elite extraversion and rent-seeking practices, while the Somaliland government is notable for enforcing protectionist regulations across a number of key markets.[61] Meanwhile, a range of Federal Member States (FMSs) have attempted to implement highly varying regulatory frameworks, creating additional hurdles for companies operating, selling or sourcing across member states’ boundaries.[62]

In the absence of effective public initiatives improving the business climate, it has been the private sector that has in practice taken the lead in economic development. As indicated by a range of business actors, Somali markets are underserved in terms of both volume and the range of products on offer.[63] As such, most sectors have been highly profitable, with entrepreneurs citing average returns of 10 to 20% on investment on a 6-month cycle.[64] As most goods are imported, limited up-front investments frequently suffice to enter into trading or retailing activities for a range of goods, potentially allowing for substantial growth. On the other hand, limited access to capital, the range of financing modalities and high interest rates have severely constrained individuals’ ability to set up new enterprises or scale up existing SMEs.[65] Lacking financing options, most SMEs have been forced to rely solely on organic growth or investments raised among family and social circles. As raising capital to seize on a profitable opportunity is constrained and professional skills are poorly available, most SMEs operating in the Somali territories should be seen as enterprises of necessity arising in response to persistently high unemployment. While some have been able to move into the import/export business, construction or small-scale industries, the vast majority are involved in petty trading activities.[66] Such activities are supplemented by small enterprises speculating on rising property prices, capturing aid rents, and in the service sector leveraging advanced skills and elite networks (e.g. through returning diaspora professionals) criticised for doing little to innovate or develop new sectors.[67]

Besides numerous micro, small and medium enterprises (MSMEs), several large transnational conglomerates are operating across a range of markets. Although these companies primarily serve the Somali market, their operations span several countries in order to overcome the institutional weaknesses of the Somali territories. For instance, many companies are incorporated in the United Kingdom in order to sign legal agreements in an internationally more accepted and predictable legal environment, while conducting their financial operations through Dubai’s flexible financial system. Most of these corporations maintain significant operations in one of the Somali markets that allows easy access to hard currencies (mostly finance and/or telecoms). Access to hard currency subsequently allows for rapid expansion into a wide range of other markets, importing required goods, skills and/or capital rather than organically expanding new ventures based on domestic resources.[68] The disparity in access to credit and foreign currencies between the major conglomerates and SMEs has allowed the former to branch out and enter markets outside of their core business, ranging from foodstuffs to electricity provision and luxury cars.[69] Rather than developing a few related markets, several of the major conglomerates rapidly established a dominant presence in most sectors, attempting to close them off from other business actors. SMEs are thus often at a disadvantage in scale, financing, logistical efficiency and branding, often making their growth opportunities reliant on their ability to collaborate with one of the bigger players. Some conglomerates have further leveraged inequalities in access to finance at times of drought or other natural calamities in order to acquire undervalued assets and land in affected areas, contributing to protracted displacement.[70]

The oligarchic market system established in Somalia is further solidified through clientelistic relationships between large corporate actors and politics. Electoral support from the private sector has frequently been repaid with preferential access to government contracts and licences, and has thereby been key to the establishment of a number of government-mandated and natural monopolies.[71] The unequal capacity of government actors and private actors has led to negotiated tax payments rather than set tax regulations, giving major companies influence over the expenditure of the funds thus raised.[72] Sizeable debt relations have further increased the private sector’s leverage over governance, and is supplemented by other individualised relationships between companies and civil servants.[73] Several large conglomerates have thus been able to operate largely unhindered by state authority, and have on occasion mobilised state authority in order to protect their market, access funds disbursed through government tenders, or otherwise support their revenue growth.[74] Regardless of the dominant position of the private sector, however, it should be noted that most SMEs and conglomerates see themselves as part of the communities in which they operate. Most private actors have gone out of their way to provide public services that are lacking and as well as extensive corporate social responsibility programmes (in addition to undisclosed zakat contributions). By providing a wide range of services, from direct payments to running fire departments and rehabilitating roads, corporate actors manage to build their licence to operate across various territories, while also contributing to social development.[75] Additionally, corporate actors have often served as important conduits for diaspora donations to combat previous disasters, given their reputation for deploying rapid, targeted and trusted disaster responses. Thus, when the COVID-19 pandemic arrived in the Somali territories, both government agencies and private businesses formed part of the response.

3.2 COVID-19 spread and health response

The number of COVID-19 cases and associated deaths has remained relatively low in the Somali territories so far (see Figure 2). However, it is likely that such low figures are strongly related to the lack of testing capacity, as the number of burials appears to have risen.[76] The virus is likely to be spreading throughout the area unchecked for some time, and actual cases may be higher than reported.[77] At the onset of the crisis, Somali samples were transported to other testing facilities in the region (such as Kenya), due to the lack of facilities able to detect COVID in Somalia and Somaliland (although some testing capacity has since been developed).[78] The Somali territories have a relatively young population, yet shared housing and underlying health conditions are relatively common due to poor nutritional standards, working conditions and sanitation.[79] The presence of internally displaced persons (IDPs) located in poor conditions on the periphery of urban centres further aggravates the risks.

The Federal Government of Somalia, the Somaliland government, local administrations and Al-Shabaab responded to the onset of the pandemic with significant awareness-raising campaigns and some measures to curb the spread of the virus.[81] At both federal and regional levels, Somali administrations established special taskforces, chaired by the respective health ministries, to coordinate the emergency response to the pandemic.[82] The federal taskforce established by the FGS involved representatives from a range of relevant ministries as well as the major corporations and business associations, who contributed not only to the emergency health response but also to the FGS’ broader policy response to the pandemic.[83] International and domestic air traffic was restricted (except in Hargeisa), with the exception of humanitarian aid-related flights and later cargo. As a consequence, diaspora travel into the country was significantly reduced. Schools, universities and madrassas were closed, khat imports were banned citing sanitary concerns (which were heavily contested by traders and consumers), and import taxes on several other goods were reduced to ensure access to essential items. Additionally, curfews were established in a number of urban centres and numerous informal shops were demolished as their facilities were not conducive to social distancing.[84] Although the initial enforcement of social distancing measures was relatively strict, most measures were effectively dropped at the start of Ramadan (May 2020) and market places remained mostly busy. Awareness raising on the virus’s traits and on prevention has continued through traditional media, social media, music and, notably, private telecoms companies – which added COVID-19 awareness messages to outgoing phone calls.[85] This may also have been related to societal efforts to further reduce transmission risks.[86]

The onset of the COVID-19 pandemic underlined the poor state of healthcare in Somalia. With FGS expenditures focusing heavily on security provision, a mere 2% of the annual budget was allocated to healthcare.[87] With just 46 intensive care units, 15 ventilators and no oxygenation plant, and one of the lowest doctor-patient ratios in the world, treatment was virtually unavailable in the capital, let alone outside of it.[88] Although efforts were made to introduce screening at ports of entry, additional training for healthcare workers and contact tracing, the severe lack of protective equipment left many in the health sector exposed. The FGS taskforce upgraded two hospitals in the capital to improve their ability to treat COVID-19 patients, one of which was funded by one of the private actors on the task force.[89] In parallel, the FGS increased efforts to procure diagnostic kits and personal and medical equipment, and was met with considerable goodwill from international donors.[90] Considerable donations came in from the World Health Organization (WHO), China, the United Arab Emirates, Turkey, Italy and others, contributing medical supplies and personal protective equipment (PPE). A Saudi-sponsored dialysis centre was repurposed as a COVID-19 facility.[91] Additional funding for the COVID-19 response was also made available from the World Bank, while existing facilities such as Baxnaano (cash-transfers for resilience programming, operated by one of the money transfer operators (MTOs) on the task force) and Gargaara (business loans for SMEs) were repurposed to deal with the societal impact of the virus.[92] Nonetheless, virtually no social safety net existed for the majority of the Somali population, forcing them to rely on social connections for support – a practice that in itself could increase transmission risk. With many basic hygiene services and items out of reach for significant parts of the population (e.g. water, sanitation and hygiene facilities for IDPs, and items such as soap seeing significant price spikes), confidence in the ability of government bodies to contain the outbreak was low.[93]

3.3 Conclusion

As discussed in this chapter, the Somali economy is weakly governed and private interests frequently intertwine with political processes. The private sector has actively contributed to development in the area. Several businesses have also been able to leverage their resources to establish and entrench their advantaged position, placing smaller enterprises at a disadvantage. Throughout the COVID-19 pandemic, weak governance and service provision has inhibited the health response. Many private enterprises responded in support of the response, however, contributing significant funds, efforts and equipment in tandem with international actors. While some of the major corporate actors were directly involved as part of the FGS taskforce and contributed to the response significantly, large parts of the Somali community were not supported by any formal social safety nets or other support programmes.