Despite decades of civil war, extremist insurgency, natural disasters and weak governance, the Somali territories have developed a growing domestic market largely in the absence of a state.
Although private businesses have played a key role in driving economic growth, they have also driven the oligopolisation of markets and the privatisation of public goods, based on particularistic networks and the unequal distribution of resources, which has also marginalised small and medium enterprises (SMEs).
The role of SMEs in fragile and conflict-affected situations (FCAS) has been highlighted for their potential to make a positive economic contribution (e.g. employment and livelihoods, availability of goods and services), as well as non-economic contributions (e.g. tax revenues, social externalities, contribution to reconstruction, trust building).
SMEs operating in FCAS face many contextual challenges to continuity and growth, due to weak security, poor infrastructure, political and economic volatility, weak formal institutions, and individual difficulties (e.g. access to finance and skilled labour, land disputes, etc).
In the Somali context, many SMEs deliberately deploy coping strategies that are ‘survivalist’ rather than growth oriented to overcome risks, relying on informal institutions and social capital to bolster continuity while remaining flexible.
Larger corporate actors have adjusted their business model to control similar risks, strongly diversifying their operations and markets, controlling capital flows and developing favourable clientelistic relationships with governance providers.
The COVID-19 pandemic has affected Somalia substantially, given its weak healthcare capacity and poor testing facilities, and has had significant economic impacts:
Heavy import reliance has led to shortages and losses as global measures against COVID-19 created a range of logistical bottlenecks delaying shipping and air travel.
Buying power has reduced substantially, as worsening economic conditions abroad translated into remittance drops, and air travel restrictions reduced diaspora travel.
Making payments and maintaining sufficient liquidity have become near impossible for businesses as the financial system has largely ceased functioning following air travel restrictions.
The economic changes have translated into significant tolls on livelihoods and government revenues (largely based on import taxes).
SMEs have been severely strained by COVID-19 imposed hardships, facing lower buying power, payment difficulties making sourcing difficult, increasing working capital requirements due to shipping delays, reduced access to finance, and complex overlapping tax regimes imposed by multiple governance providers.
Although larger corporate actors have incurred major costs due to repayment holidays on loans, popular demands for price reductions on various services, and substantial contributions to the public COVID-19 response, many have been able to weather the storm through their role in delivering COVID-19 aid and cash voucher schemes, foreign held capital reserves, preferential access to finance, and the ability to negotiate tax exemptions directly with governance providers.
Smaller ventures have been additionally hit by changes in political finance structures, as import tax reductions have been seized upon for political finance, thus destabilising prices, and racketeering around port clearances has also emerged.
The support the private sector has provided to the COVID-19 response has likely supported a range of livelihoods throughout the Somali territories, yet 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 economic crisis caused by COVID-19 has therefore reinforced rather than destabilised those dynamics that prevent small businesses from competing on an equal footing and fragile situations from developing and stabilising.
Additionally, the pandemic 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.
Based on the analysis, the following recommendations are made:
Stimulate technical advances in SME finance in order reduce the vulnerabilities of SMEs to economic or logistical shocks.
Explore opportunities to invest in SME associations able to articulate SME interests and participate in inclusive policy-making efforts.
Building Back Better efforts post-COVID-19 should stimulate the non-trading economy in order to reduce the severe vulnerability of the Somali economy to external shocks.