As noted in Chapter 2, SMEs are acknowledged as significant drivers of socioeconomic development due to their important role in GDP growth, job creation and stimulating increasing entrepreneurship. However, in fragile state contexts, the legacy of violent conflict often imposes constraints on economic and private sector growth, including: damaged commercial networks; loss of trust; weakening of market institutions; and political uncertainty.[184] These fragile contexts include political instability and economic activity influenced by general risk aversion, planning along short time horizons, and distorted political and economic incentives. The effects of pervasive insecurity, governance inefficiency and inadequate infrastructure (both hard and soft) on private sector development are well known.[185] In particular, SMEs suffer from inadequate access to finance,[186] technology[187] and markets.[188] They therefore have low capacity to compete with larger firms, are disproportionately affected by disruptions in the regulatory environment,[189] and lack entrepreneurial human capital.[190] 

Research has shown that, in such an environment, development assistance to SMEs ‘carries the risk of reinforcing the same structures that prevent small businesses from growing and fragile situations from stabilizing’.[191] The success of many SMEs in fragile and conflict settings hinges on their ability to rely on personal and social networks, as well as on arrangements with non-state governance actors (e.g. traditional leaders or insurgent groups) or through informal relations with governments or armed groups.[192] In cases of armed conflict, risks of criminal violence or expropriation of property, firms seek protection through their connections to armed groups (if such armed groups are not already heavily involved in the business venture itself). Governance providers in FCAS have been considered as political entrepreneurs managing a market exchanging loyalty and economic rents, through their ability to grant favours to potential spoilers.[193] Although SME development assistance runs through central governance mechanisms, its implementation is highly discretionary, leaving the success of SMEs heavily reliant on local elites and their access to social capital. Yet, compared to large corporations, they pay more tax on average, boosting the revenue of governance providers, and play a more consistent role in day-to-day security and social service provision (including employment).

To date, development efforts targeting Somali SMEs have often inadequately accounted for Somalia’s political-economy structure – at both national and local levels – failing consider the informal norms, regulatory authority and practices that govern the private sphere. This chapter explores what COVID-19 and the associated economic constraints may reveal about Somalia’s political-economic dynamics. It starts by setting out the impacted dynamics of the Somali business environment. Subsequently it explores how the unequal relationship between various market players evolved, and how this has affected these actors’ relationship with governance providers.

5.1 Business’ coping with fragility

In most conflict-affected countries the private sector has a missing middle – instead of a range of medium enterprises, there is a small number of large companies (often preferentially owned by members of the elite) and a large number of small ones.[194] As such, large areas of the private sector in fragile and conflict-affected countries are not really competitive, as they are controlled by conglomerates and elite groups. These large companies derive their profits from rents extracted due to their size and power, as well as a distortionary policy environment. In Somalia many of these conglomerates emerged out of the civil war through technological innovation and by trading in foreign exchange. The major traders and businessmen in Somalia have a strong hold on political power, frequently using their access to external capital (and threats of relocation, whether to Somaliland, Turkey, Djibouti, etc) to influence policy choices. These conglomerates are characterised by expansive operations and significant diversification that has historically placed a chokehold on competition, as they have come to dominate crucial sectors of Somalia’s service industry (including telecommunications, electricity, finance and import/export).[195] Outside of these sectors, however, there is relatively more space for SMEs to conduct their business: in addition to small shops, many SMEs run services (such as hotels and restaurants) and small-scale exports (e.g. fish).

In the Somali context, which features high uncertainty, high risk, lack of access to formal financial markets and monopolisation, many SMEs deliberately deploy coping strategies that are ‘survivalist’ rather than growth oriented. They aim to solidify the existing connections that grant them access to contracts, licences, tax cuts and other forms of protection, rather than develop new initiatives in an attempt to grow. Somali companies are notoriously risk averse, avoiding illiquid investments and requiring immediate payment to avoid debt. SMEs cope with conflict by containing cost and risk through the use of organisational and transactional measures, also avoiding growth in order to circumvent the attention of governance providers and armed actors, who may wish to extract or assume a stake in an expanding business.[196] This is critical, as it contributes to a landscape of financial opacity, illiquidity and capital flight, as ‘being successful’ increases demands from society and the state.[197] These entrepreneurs who are strongly reliant on social capital to access finance and opportunities maintain the methods they used successfully during wartime, creating conflict and debt overhang, but also forming a highly flexible business model that allows companies to move rapidly across sectors, regions and value-added activities. This business model is informed by the structures of Somali trade corridors, as dynamic spaces under the jurisdiction of multiple de facto and de jure public authorities, which make a range of varying tax-claims on trade and livestock activities.[198]

It has been argued that, in such an environment, a government is unlikely to be a facilitator of business activities, and instead may view businesses as opponents.[199] In Somalia, the FGS’ laissez faire attitude towards business has been substituted with a recognition that private companies (including SMEs) play an important role in realising the country’s development objectives, including in qualifying for debt relief. Both national and regional governance providers have thus been attempting to bestow favours while increasing their domestic revenues, establishing overlapping tax regimes with varying success. However, Somali businesses have been able to maintain a high degree of autonomy from the state given their control over access to foreign exchange, with the capacity to block key legislation around banking and telecommunications. Yet, it is not an ‘economy without a state’ per se, as political entrepreneurs, conglomerates and technocrats are entangled in a web of political clientelism, and redistribution, as well as debt relations specifically linked to new state finance structures (often linked to prospective oil rents and debt relief).[200] For instance, a number of logistics contractors that led the Islamic Courts Union (ICU) have since run for elected office to recoup debts from the civil war and to protect business interests, instrumentalising socioeconomic grievances to agitate against state intervention in the economy and society.[201] Other clan-connected powerbrokers exercise their influence through dense social networks and capital, also agitating against state intervention in the private sector.

These economic practices are ultimately not conducive to economic growth and development, but rather cement patterns of elite capture and short planning horizons. While regulatory measures have been consistently on the agenda since 2012 (including anti-trust laws and increased taxation) they have so far delivered mixed results as the state also relies on businesses to resolve conflicts and to provide social and public services.[202] Understanding the unique multidimensional pressures that SMEs experience within Somalia’s political economy is critical, as the challenges faced by these businesses are not always improved through capital injections. As is evident elsewhere, the impact of capital injection, FDI or microfinance relief may even reinforce hierarchies of power and may lead to an upsurge in imports and a ‘crowding out’ of domestic investment, thus negatively affecting SMEs’ growth.[203] An influx of aid and investment may also adversely affect SMEs by creating incentives for entrepreneurs to focus on rent-seeking over business creation. Those that also hold parliamentary or government positions may also influence flows of aid in ways that create a new class of ‘oligarchs’ tied to aid-based contracts, won through lobbying, and market and regulatory capture, as well as through political influence.[204]

5.2 Impact on businesses and SMEs

As many respondents explain, the impact of COVID-19 has been decidedly different than that of past crises, including previous droughts, famines and civil war. As one business owner reported, ‘Civil war, famine and drought often impact the poor. COVID-19 crisis has hit the middle class and rich. We lost money and the government doesn’t seem to care because we are investors.’[205] This was a commonly held opinion – that the business community writ large had been disproportionately affected by the crisis, and was receiving insufficient assistance from the state or international donors. Making the comparison to the civil war, SMEs explained how during the warlord era business was simpler: ‘Taxes were in a form of negotiation. You only had to have tribal protection for your business. You knew who you were dealing with and how to handle them; but today on top of COVID, businessmen are paying taxes to two different governments as well as Al-Shabaab and dealing with unconventional price competition. It’s unsustainable.’[206] His statement challenges some of the preconceptions about how business benefits from conflict, and may even encourage it, indicating instead that the complexities of COVID had created a series of interconnected social, financial and political effects. The largest issues for SMEs were disruptions to transport corridors and trade links and hampered access to credit and liquidity. For instance, SMEs engaged in overland trade reported disruptions due to border closures that resulted in the increased number of militia checkpoints as different authorities were squeezed for cash.[207] SMEs have fewer protections through government and personal security and additionally face inconsistent tax policies by local and national authorities. The provision of tax breaks only to food and oil importers fed narratives of the FGS’s urban bias, benefitting elite firms and neglecting small farmers and fishermen. No support was provided to help local producers or export-focused companies (for instance in agriculture) to help reduce prices and overcome bottlenecks and facilitate access to key markets, nor was there support for manufacturing to maintain employment levels.

As explained in Chapter 4, COVID-19 has affected logistics, not only for remittances but all aspects of trade, as quarantine measures in major ports caused delays and unpredictable shipping. Such developments opened up some opportunities for domestic airlines, which were not affected by international shocks. Yet, SMEs still faced longer cycle times without being able to negotiate rapid clearance, and requiring more working capital to cover for longer transit times. Additionally, increasingly unpredictable trans-shipment periods and increases in import taxes on selected goods have disproportionately hurt small traders and brokers.[208] According to a business owner in the fishing sector in Garowe, COVID-19 has had substantial adverse effects on the industry at all levels, in terms of export, import, labour and finances. This has largely been due to the Yemen-Saudi border closure, as well as to the decline of activity in the hospitality sector and restrictions on flights and travel. The entrepreneur reported a loss of 50% in local market businesses (mainly hotels and restaurants), and a complete drop in export business. Moreover, the entrepreneur reported that ‘COVID affected local fishermen the worst, and cash flow injections aren’t going to reach them, even though they remain destitute. During the last four months they have had no work.’

The major MTOs have fared better in comparison to SMEs. Several of the major MTOs have been able to offset losses and capital shortages through their role in delivering COVID-19 related development aid and cash voucher schemes, as well as through the significant funds that they maintain abroad (in foreign currencies).[209] While MTOs faced social pressures to impose repayment holidays on loans and price reductions on telecommunications and other services, many have been able to continue introducing new services and major promotions to compete for customers.[210] Throughout the crisis MTOs have continued to provide loans to major importers to some degree, considering them as lower-risk clients due to their ability to put up collateral and the fact that under Somali Islamic trade financing imported goods are owned and imported by the financier (allowing banks to divert shipments and sell elsewhere in case of client default).[211] It emphasises a larger trend in the importance of social capital, networks and access in navigating contracted government and financial operations. For instance, disruptions to supply chains have created opportunities for racketeering around port clearance (especially in light of the unpredictable transit-period to offload and load Somali shipments to smaller ships) and taking advantage of import taxation cuts reportedly driven by elites. When all cafes and restaurants were reported to close at the onset of the conflict, many of the larger chain cafes and restaurants remained open, able to take advantage of a workaround.

As such, the effects of COVID-19 are highly unequal and SMEs remain hardest hit by the contraction of lending activities (loans, remittances, credit and working capital) and disruptions to global value chains and social networks.[212] Newer entrants to the business industry in particular are even worse hit, as they frequently have not been able to establish other assets that could serve as collateral, nor do they have access to the political connections that larger enterprises thrive on.[213] Additionally, small and medium enterprises also faced a reduction in buying power following declining remittances. The impact of such shocks was, for many SMEs, compounded by long-term weak financial and cashflow management and the dominance of mobile money.[214] As petty trade is mostly conducted in Somali(land) shillings, retailers, importers and producers of low-value items have been especially affected by the unstable exchange rate and parallel foreign exchange systems, as well as high inflation.

Retailers and petty traders have faced declining demand, forcing many to close either temporarily or permanently. In a recent IOM study surveying 320 women-led businesses, over 300 reported reduced revenues and sales. About half reported having to put their operation on hold, and about the same number said they faced difficulty paying back loans or rent. Almost 60% said they had been forced to shut down during the pandemic, with about one-third of that group closing permanently.[215] These findings are consistent with evidence from across Africa which shows that many SMEs are not receiving any government support to combat the economic downturn.[216] The issues cited include existing debt, lack of access to relief funding, lack of cash reserves, inability to operate during lockdown and inadequate or outdated access to financial information.

Other SMEs reported shifts in lifestyle that have affected certain luxury services – for instance, industrial dry cleaning facilities in Mogadishu indicate a loss in revenue as people turn to more traditional laundry businesses that are cheaper. Travel companies (particularly those operating around the Hajj) reported that they had to close down but continued to pay 50% with the expectation that employees ‘will pay it back gradually once the business returns’.[217] Despite the many negative reports, there are also positive stories of SME resilience, grounded in the experience of prolonged conflict that include trust-based shareholder schemes, family support and the importance of reputational capital that long-enduring SMEs appreciate. A few SMEs also offer a more optimistic outlook:

‘Somali businesses are always resilient. Despite the losses, few have actually shut down their businesses. Our partners still imported essential goods even though they weren’t given a tax break. You can still rely on our social capital and credit systems: when my customers could no longer afford the price of the hotel, we had to offer major discounts. Several diaspora customers who were stranded were given two rent-free months because they ran out of money.’[218]

5.3 Inequality, competition and governance

As COVID-19 spread in the Horn of Africa towards the end of March, rumours started to circulate regarding trade restrictions in India and China, causing panic buying and food shortages. Prices of several staple goods such as sugar, rice and cooking oil rose by about 20% within a two-week period. However, as traders in Puntland and Mogadishu reported, this turned out to be a deliberate act by a number of brokers who initiated the rumours, buying up stock and raising prices. By the end of April prices had largely come down again for rice and sugar, although modest price increases have persisted for rice, sugar, flour and spaghetti.[219] Aiming to counter speculators in the market jeopardising the affordability of key consumption goods, the FGS appealed to business people not to take advantage of this crisis by overcharging consumers. This was arranged by applying a 50% import tax cut on many foodstuffs in order to stabilise prices – a policy that has kept the prices of these items the same (not lower) and benefited importers over local producers. Tax breaks for essential items were heavily negotiated in ways that likely benefited the larger corporations. For instance, as one large importer explained, ‘We lobbied for the government to give us a tax break because we were experiencing heavy demands to bring cooking oil and pressure to use alternative more expensive shipping methods. The government finally agreed.’ [220] Other importers in pasta, cement and khat engaged in lobbying efforts for these items to be categorised as ‘essential’, which many other business actors interpreted as a way of exchanging favours ahead of elections.

Reports confirm that as taxes on imported foodstuffs fell, new rent-seeking actors – including politicians – entered the market in an attempt to take advantage of the tax cuts and the unfulfilled demand, which led to a significant surplus of these foodstuffs, further destabilising prices.[221] These newcomers imported large amounts of flour, rice, dates and other items, selling at significantly lower prices than market prices. Stores across Mogadishu were hence full, although buying power had plummeted due to reductions and delays in remittances, and SMEs that required a stabilisation of market prices were disadvantaged. Some SME businesses explained the food market as simply the latest avenue for political finance – i.e. the need to clean and move cash abroad – especially as the normal channels of construction and government contracting had dried up. As one businessman recounts, ‘Leaders and politicians launder the money by investing in a successful healthy company. Basically, doing a capital injection with a condition to get back at least 70% of his money clean.’[222] Although there were widespread perceptions that construction had dried up, the effects were actually mixed, demonstrating the considerable resilience of the construction industry in fragile contexts. There was, however, evidence of a consolidation of market opportunities by large conglomerates. Large cement importers explained that they remained unaffected and offered critical credit to other importers of oil and food, but also noted that smaller companies that could not cope with disruptions to supply chains and government security clearance had closed down.[223] More broadly, the construction industry faced an initial spike in prices for materials and large construction projects (e.g. building of major roads, and construction around the airport and for government premises) but these prices levelled off as importers found new routes and suppliers. New expected projects funded by the international community largely came to a halt due to reduced aid expenditures, leaving many contracted companies at a loss, although projects already underway and other civilian projects were unaffected.[224]

Diaspora entrepreneurs, e.g. investors, start-up leaders and traders between the West and Somalia, were also heavily affected. For instance, as traders and importers reported relative ease in resuming trade in the Gulf and Asia, import/export companies that had strong trade relations with countries in the Western hemisphere (Canada and UK) indicated that they faced closure, mass unemployment and being forced to sell assets.[225] More broadly, they are some indications of a deteriorating business relationship with Saudi Arabia and UAE, and a strengthening of trade ties with Turkey, Qatar, Bahrain and Oman, ‘who are working with Somali businessmen to come up with a faster way to deliver goods into Somalia’.[226] The stability of these economic relations are tied to broader political dynamics and shifting alliances but also highlight the importance of long-standing networks and relations or ‘cosmopolitan capital’ that disproportionately benefit certain groups of business people and capital above others. At the same time, national forms of capital decline in importance and are differentiated increasingly into national and international fractions.[227] Somalia’s economy is one of entanglements but also differentiations that have not been properly explored.

The disparity between the ability of SMEs and larger conglomerates to navigate the crisis is directly evident in the crisis response, as most major companies were part of the government’s COVID-taskforce, whereas SMEs have had little representation and few ways to lobby for their interests. As part of the COVID taskforce, large corporations provided what businesses called ‘informal grants’ to the government to provide for medical supplies, ventilators, etc. Such informal grants are frequently paid back either in full or in kind through tax cuts.[228] The perception was that the taxation burden still fell on small traders, retailers and other SMEs that generally lack the bargaining power of conglomerates.[229] There are also fears that, as strongly diversified companies, conglomerates have expanded operations into farming and livestock, buying up devalued land as titleholders go bankrupt or are in urgent need of funds, as agricultural land can later serve as a valuable productive asset and has an important role as collateral.[230] This has been reported as driving land evictions in Kismayo and Hobyo throughout the crisis.[231] Additionally, there have been criticisms of entities that hold significant public assets (including land and property) but make no contribution to public works in these areas.

SMEs also raised concerns about increases in corruption in relation to the COVID-19 response and ahead of the elections. Following the replacement of the minister, a substantial corruption scandal unfolded at the Ministry of Health, paving the way for the COVID-19 response to be moved to the Office of the Prime Minister.[232] The investigation uncovered substantial embezzlement of COVID-19 earmarked funds. It should be noted, however, that a substantial part of COVID-19 support was provided in kind as well, in the form of personal protective equipment (PPE) and other medical supplies. Throughout the response to COVID-19, supplies (often donor-branded) reportedly continued to find their way to the marketplace, as actors involved in the response diverted supplies in order to resell them.[233] While such practices may facilitate a range of political financing needs, they are also likely to undercut private vendors attempting to supply the surging demand for PPE.

By contrast, small traders, retailers and other SMEs who generally lack the bargaining power of conglomerates have continued to make tax contributions (with multiple taxation systems in place from Al-Shabaab, regional governments and central government). Initial promises of tax relief and postponements were rarely implemented or seized upon by SMEs. Some have blamed this on a lack of awareness of formal regulations among petty traders, suspicious of governments offering tax breaks (while informal shops were being demolished). Others explained how they made arrangements to defer tax or to have their tax burden reduced, only to be later harassed by tax authorities.[234]

5.4 Conclusion

The COVID-19 pandemic has affected the political economy of the Somali territories in a few key ways. In contrast to previous crisis periods, like drought, famine and civil war, COVID-19 produced both logistical constraints, declining availability of finance and liquidity, and incoherent overlapping tax regimes which have made it hard for many SMEs to make it through the crisis. While some measures were introduced to support companies, such as tax cuts for certain essential imported goods, regulation was not fully developed and created resentment and competition. The larger corporate actors in Somalia faced a distinctly different situation, however. Given their strong hold over the financial system, capital reserves abroad, diversified operations and strong relationships with governance providers, they were generally better able to navigate and even benefit from the economic constraints. Although such actors were under pressure to impose repayment holidays on loans, lower the prices of services, secure employment, and fund significant parts of the COVID-19 response as well as providing other handouts, they were able benefit from reciprocal relationships with governance providers – allowing them to negotiate tax cuts, benefit from COVID-19 aid and access new market opportunities.

Existing research analysing Somali businesses and political economy has paid insufficient attention to disaggregating among sectors and market levels to discerning business interests, tactics and vulnerabilities. The negotiations around the informal/formal and public/private are heavily negotiated by different regulatory authorities, practical norms and patterns of accumulation. Business are indisputably embedded in society, which informs the important and visible role they provide in terms of social and public services, and their critical access to foreign exchange rivals the authority and legitimacy of the state. Yet businesses are also increasingly reliant on the state in certain critical ways (security, regulation and access to new markets like oil and debt relief). The electoral business cycle is always busy as medium-sized enterprises and corporate actors seek to protect existing arrangements and secure new opportunities that risk overshadowing aid and macro-economic policies to alleviate debt burdens and struggles felt at the lower ends of the market.