The global COVID-19 pandemic has had a considerable toll on the Somali economy. Disruptions in the major economies supplying and trans-shipping goods for Somalia’s import-based economy have caused significant logistical disruptions, shortages and price fluctuations. Additionally, restrictions on movement have hampered the ability of MTOs to maintain the franco valuta payment system on which the country relies, thereby significantly disrupting people’s ability to make payments and reducing the availability of financing. Financial inflows were further affected by the economic setback across Europe and the United States, affecting the welfare of the Somali diaspora and thus reducing remittances and indirectly buying power and small enterprise finance within the Somali territories. As trade declined, government revenues were also affected, given the reliance on taxes and fees related to imports and passenger travel as well as ODA-funded projects. While such shortfalls were to some extend made up through additional COVID-19 related emergency financing, the shift in funding streams required the realignment of political financing patterns and created price instability as political actors sought new ventures through which to move the funds.

Somalia’s private sector took a significant hit throughout the crisis. Some of the larger companies and traders aimed to maintain stable affordable prices on key goods in return for an import tax waiver from the FGS while also having to absorb delays in delivery of items. Meanwhile, liquidity constraints within the financial system hampered companies’ activities within Somalia, and forced those granting credit to extend significant payment holidays. Although such losses are likely to be substantial, many of these companies have been able to maintain significant reserves, frequently abroad, allowing them to circumvent some of the credit constraints. Additionally, these companies’ broad and diversified portfolio, as well as their strong presence in import-export activities, has meant they were perceived as low-risk clients able to maintain access to many credit lines. Reducing buying power in the Somali market severely curtailed the activities of SMEs operating as retailers, petty traders or local service providers. For those that maintained demand, the limited working capital they possess was quickly strained due to poor cash flow management, longer time cycles, limited ability to maintain stocks, and reduced access to financing options. With limited options to diversify and with destabilising market prices, many small and medium enterprises floundered or shut down completely (either temporarily or permanently).

While the economic shock brought about by COVID-19 did not structurally change the Somali political economy, it did exacerbate existing patterns of inequality. Many SMEs were severely affected or shuttered, and were generally unable to leverage their network to overcome the constraints imposed by the crisis. Meanwhile, many of the larger companies were able to contribute meaningful support to the COVID-19 response while also continuing the launch of new offers and significant price cuts. Although the support the private sector provided to the COVID-19 response is likely to have supported a range of livelihoods throughout the Somali territories, the preferential access to governance and strong competitive position that allowed this also highlights a worrying level of inequality and market concentration, and raises questions regarding government legitimacy. It seems likely that the COVID-induced economic crisis has there reinforced rather than destabilised those dynamics that prevent small businesses from competing on an equal footing and fragile situations from stabilising. Additionally, it has exposed the sizeable vulnerability associated with the Somali territories’ import dependence and financing system, creating sizeable risks to the livelihoods of those depending on these systems. Donors seeking to support economic and governance development in the Somali territories should therefore consider the following recommendations:

Recommendation 1 – Stimulate technical advances in SME finance

The limited availability of financing opportunities for SMEs is a common problem across fragile and conflict-affected states, and a known bottleneck for development in both Somalia and Somaliland (both foreign and domestic sources). Although this bottleneck may slow down economic development, the COVID-19 pandemic has additionally highlighted the technical limitations of financial service providers, leading to highly unequal access to the financial means to survive the crisis. Many of the large companies active in the Somali territories have independent access to offshore funds and financial services, or are active predominantly in markets considered low risk by domestic financiers (e.g. import-export trading). SMEs, even those that are relatively well established and operating a viable business model, frequently lack such access. For instance, even at the height of the COVID-19 pandemic in Mogadishu even relatively know entrepreneurs were unable to secure funding to set up a facemask sewing operation, despite soaring demand and prices.[235]

The activities pursued by SMEs frequently involve higher risk or technically more complex financial products, notably the financing of working capital, non-trade direct expenditures or the purchase of capital goods that pay back over a longer term. Lacking such financing opportunities, small and medium-sized companies are disproportionately likely to flounder in the face of trade restrictions or economic shocks. Such shocks are further compounded by many domestic entrepreneurs’ limited capacity in the area of cash flow management. Given the strong connections between private sector interests and the functioning of governance within Somalia, both development and stabilisation efforts might be well served by efforts to develop SME finance and skills training.

Recommendation 2 – Inclusion of SME interests in governance

Government action to stabilise prices in the form of import tariff cuts have had a positive effect in that it prevented an extended period of inflated pricing on staples that could have put severe pressures on lower-income groups. That being said, large traders were able to benefit to a much larger extent than smaller traders by increasing significantly the amount of imports during the period in which tariff cuts were in place (thereby increasing margins on their future sales). More generally, larger companies benefited more from government measures due to their overall proximity to officials and their ability to lobby for their interests. Exacerbating this problem were new market entrants, including political actors, that reaped part of the benefits of imposed tax breaks. Smaller companies rarely made use of available tax breaks, which may be due to a lack of knowledge or their relationship to governance providers. A number of smaller businesses were demolished at the start of the virus outbreak, which may have provided an additional rationale for some to stay below the radar. In an overall context of post-war economic growth, it is important to pay close attention to these dynamics of unequal distribution of bargaining power and unequal competition that shape Somalia’s political economy and that is rendered even more visible during a crisis. The lack of an equal playing field may translate into unequal impacts on businesses during a crisis, causing many smaller businesses to shut and reinforcing patterns of inequality.

The poor influence that smaller businesses have on government decisions may thus be detrimental to political stability in the medium term. Small and medium-sized enterprises should be included in policymaking for their sector, for instance through measures increasing their degree of collective organisation and interest articulation. From the government side, it should be remembered that although market share, price impact and tax revenues associated with these enterprises may be limited, the number of livelihoods they support are substantial. As such, crisis response measures aiming to affect selected markets should make use of inclusive consultation procedures. An example can be found in Burkina Faso, where pressure from small traders following the closure of markets in major cities led to their reopening one month later with tighter public health measures. Donors may want to explore opportunities to invest in SME associations able to articulate SME interests and weigh in on key pieces of policy.

Recommendation 3 – Building Back Better efforts post-COVID-19 should stimulate the non-trading economy

Although the substantial efforts involved in establishing Somalia’s growing imports-based economy have been highly effective at ensuring the reliable availability of a wide range of goods at a relatively low price and have supported a wide range of livelihoods and consumption for low-income groups, the COVID-19 pandemic has highlighted the limits of this system. Shipping delays on goods from a number of the major overseas trading partners, disruptions at trans-shipment harbours, the civil conflict in Ethiopia hurting cross-border trade, and air traffic disruptions hamstringing MTOs created significant shortages, price instability and payment difficulties. The lack of physical inflows into the Somali economy brought many economic sectors to a standstill, affecting livelihoods as well as the accessibility of various goods and services. Domestically produced goods, to the extent they existed, were rarely able to fill the gaps that occurred nor supplement livelihoods.

As aid portfolios are realigned in response to the pandemic, aiming to address the widened shortfalls towards meeting the Sustainable Development Goals (SDGs), notably SDG 10, along the Building Back Better agenda, the structural bottlenecks exposing the Somali economy to logistical shocks should be addressed. In the short term, Somali traders have likely already initiated efforts to diversify their sourcing and trans-shipment operations, and MTOs are likely to be reassessing their operations as well given the losses incurred over the last few months. In the longer term, however, significant vulnerabilities will remain unless advancements are made in the domestic economy of Somali territories. Besides security constraints and the financing constraints noted above, several key bottlenecks have withheld such developments, notably monopoly practices in several markets, expensive and unreliable electricity, and a shortage of qualified human resources. As a consequence, programming aiming to support Somalia and Somaliland in Building Back Better is unlikely to generate significant results unless the major bottlenecks holding back development of new value chains are tackled.