Sonomics: The Potential Economic Impact of COVID-19 on Somalia

The COVID-19 pandemic is only just beginning to take hold in Somalia, but it is already having a huge impact. While Somalia still accounts for relatively few deaths from the disease, the numbers are rising, with more than 116 cases confirmed and 5 deaths as of April 17, 2020.

It is important to assess the socio-economic impact of COVID-19, although the pandemic is at a less advanced stage in Somalia, its economy remains informal and very vulnerable to external shocks.

The crisis is likely to push millions of households into poverty. Food security is at risk because of trade disruptions, lower agricultural production, and fewer food imports. International trade; crashing demand from China, the Middle East and the rest of the world will dry down major economic sectors, notably agriculture, livestock, and tourism. Migrant remittances are already experiencing a slow down as a result of the pandemic as they are an important source of external finance in Somalia. In general, migrant remittances contribute substantially to economic growth and household incomes both in rural and urban areas.

The World Bank’s recent Africa’s Pulse report found that COVID-19 is likely to drive Sub-Saharan Africa into its first recession in 25 years, with growth potentially falling as low as negative 5.1% in 2020. In Somalia, the data to develop such diagnostic models of the impact of the virus is not readily available to the Ministry of Finance, but from the behavioral analysis, there is an estimate of a potential GDP contraction ranging between 35 – 45 percent, resulting in significant welfare deterioration for Somali citizens at large as well as a concerning fall in domestic revenue potential.

As detailed in a Briefing Note on the Potential Economic Consequences of the Corona Virus on Somalia by the Ministry of Finance of Somalia, COVID19 presents a series of risks to the Somali economy and consequently to the Government’s fiscal policy priorities for FY2020. These harmful effects could be both endogenous and exogenous.

The potential impact of the virus ranges from a decline in exports mainly on livestock shipments to the Middle East which will adversely lead to a 15 – 25 percent reduction in GDP to fall of remittances which was estimated to account for around 29 percent of GDP in 2018, this could lead to up to a 15 – 25 percent reduction in GDP if remittances fall commensurately with the contraction in western economies.

Certainly, imports to Somalia will also resort to a negative outlook. With China accounting for over 17 percent of Somalia’s imports in 2017, disruptions in China’s manufacturing sector are likely to result in fewer goods being shipped to Somalia. Furthermore, given the ban on flights instituted by the Government, Khat imports from Kenya have also radically decreased. From the decline of imports, the government’s revenue is likely to fall since the customs duties are a key source of domestic revenue.

Unemployment is also an inevitable economic threat arising from the consequences of the virus. Any reduction in private sector firms’ revenue, slowdown in port efficiency or fall in the flow of imports is likely to lead to an increase in layoffs for the few that are employed, further exacerbating the country’s endemic unemployment problem.

Despite all the negative implications that COVID19 has posed on Somalia’s economy, the fiscal measures developed by the Ministry of Finance from tax elimination to tax discounts are worthy notable.

However, Somalia still needs to mug up lessons from social safety net policies established by fellow African nations; Uganda allowed businesses to reschedule social security contributions, Namibia offered an emergency income grant to workers who lost jobs, Cabo Verde offered cash transfers and food assistance, and the Central Bank of West African States has abolished a number of transaction costs.

And finally, to keep the economy on the normal track, Somalia has to stick on the three economic policy objectives proposed by IMF in the face of COVID-19; guarantee functioning of essential sectors, provide resources for people hit by the crisis and prevent excessive economic disruption.

 

Luqman Yasin Gelle, April 2020

Blogger & Certified Professional Banker.

Blog: http://luqmangelle.wordpress.com

Twitter: @LuqmanGelle

Email: Luqmaanyare2000@gmail.com

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