Somalilands private sector Challenges

Ahmed Burale
Business Analyst
Hargiesa, Somaliland
Email:Ahmedburale7@gmail.com

2015

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Background
Somaliland unilaterally declared independence from Somalia in 1991, but it still lacks
international recognition. The Republic of Somaliland is situated in the Horn of Africa with
boundaries defined by the Gulf of Aden in the North, Somalia in the East and Southeast, the
Federal Republic of Ethiopia in the South and West, and the Republic of Djibouti to the
Northwest. The total population of Somaliland is estimated at 3.5 million.
Livestock is the main pillar of Somalilands economy; it is estimated to contribute 60% of the
GDP. Somaliland is considered to have a relatively young population, 70% of the populations
being below 30 years of age.
Although over sixty percent of Somalilands government budget in 2015 was spent on human
resources, 75% of young people are jobless. According to ILOs (2015) decent work program,
there is a critical shortage of skilled and semi-skilled workforce due to the absence of vocational
education.
According to An Investment Guide to Somaliland Opportunities & Conditions 2013 2014 (P:
18),Over the past decade, investment into the Somaliland economy particularly by the global
Somali Diaspora community has been steadily growing as peace and stability has improved. As
revealed in this investment guide the government is seeking to encourage investors through
incentives including tax exemptions and land leasing. There is a strong system of investment
rights and a straightforward corporate law where investors can get adequate protection and
compensation for their investments.
Similarly, under the Somaliland arrangements in the New Deal, PSG4 on economic foundations
recognizes private sector development as the key driver for economic development.

The private sector

Private sector improvement intensifies any nations vision towards development; it contributes to
development in different ways, jobs creation, domestic productions, foreign exchange gains and
solving marketing constraints.

In the 21st century era

where technological innovations,

globalization, rapid population growth, youth unemployment and extremism are touching todays
nations in the world, states will have no chance to sit back without bearing in mind the
improvement of their private sector and youth employment.
Currently, with its vision 2030, the Somaliland government is committed to create a well
developed private sector that provides investment, employment, sustainable livelihoods and vital
services to strengthen the economic foundation. Somaliland has untapped abundant natural
resources. It has fertile Mineral land, an attractive geographical location in Babal mandab Canal
and bordering Ethiopia (the largest land-locked in the Horn of Africa with a large domestic
market of almost 86 million consumers).

However, Somalilands potential has yet to be

adequately utilized. Somaliland is a low-income country and it faces private sector challenges
which are more commonly found in low income countries. These include dependence on
imported goods, trade deficit and insufficient energy.
Lack of Proper banking system
Banks are essential for any countrys economy, as no growth can be achieved without savings
being efficiently channeled into investment. In this respect, the lack of a fully-fledged banking
system has often been identified as a major weakness of the centrally planned economies.
(Asenka Asenova, P: 1. 2006)
Somaliland gives unique banking challenges to all private sector industries.

Apart from

terrorism concerns, the most important constraint factor is the absence of a fully functioning
central bank, hence the private sector has no secure access and internationally acceptable money
transfer system.
The absence of a conventional financial system is significantly hindering access to finance which
is the number one constraint on private sector activity in Somaliland. (World Bank, 2014).

Although Government of Somaliland believes that an efficient financial sector is a crucial

enabler of economic growth and also considered to be essential for income generation and
economic recovery, the financial sector is dominated by private companies.
According an investment guide to Somaliland in 2013-2014 (P:119) These service providers do
not provide the full range of financial services required for dynamic private sector-led growth
though.
Generally the central bank determines daily exchange rates of the currency against foreign
currencies and market participants have to use these exchange rates for their transactions.
Unfortunately, in Somaliland daily exchange rates are determined by unknown individuals,
which lead to the country to experience unexpected repetitive exchange rates fluctuations and
inflations. Furthermore, foreign currencies, particularly the USD, dominate to the national
money. Sales transactions are undertaken using the USD and Local Money Transfer companies
usually transact USD.
Private firms and individuals are reluctant to deposit their money at the Central Bank of
Somaliland which is currently utilized as revenue collection centre by the government and most
of the private companies and businesses use private saving banks specifically Dahabshiil and
Salaama banks for their savings.
Somaliland Entrepreneurs face multiple challenges caused by the absence of Financial
Institutions which undermine their ability to transact international businesses. The firms are
unable to find out in Somaliland essential services such as insurance, letters of credit and
interbank financial transfers to International businesses.
According to Bekkin R. (2007. P: 1) the main problem faced by the countrys banking sector is
the absence of sufficient capital and guarantees. If banks require capital, the Bank of Somaliland
is not able to provide it.
Private sector-led growth remains highly constrained due to lack of conventional banking system
and other supporting financial services to underpin investments. Entrepreneurs find it difficult to
obtain capital, or to establish lines of credit for business expansion or survival in difficult times.

It is believed that the growth of the private sector has been constrained by the absence of
commercial banks and credit institutions.
Traders purchase things outside the country by facing multiple risks. When they intend to
purchase outside the country, they send the money to agents based in the countries of the
manufacturers or suppliers countries through insecure informal Remittances. According to Mr.
Abdilqadir Muumin, a young trader based in Somaliland, such agents often take the money and
fail to deliver the goods. In 2014, the Somaliland government also passed a law establishing a
central bank for the first time.
However, the establishment of a banking sector is expected to make business transactions within
the state significantly easier. The establishment of a banking sector will also provide
opportunities for both National and foreign companies.
Energy Sector
The Energy industry is one of the largest and most complex industries in the world today that
touches on peoples everyday lives, as well as one of the key drivers of private sectors
development, particularly industrial sector. Somaliland has not yet succeeded to utilize its natural
resources of energy. At present the source of energy in Somaliland is petroleum which is wholly
imported by privately owned enterprises.
Although several visibility studies have shown the availability of huge fuel energy in the
country, cheap and adequate energy is still a dream for Somalilanders. Solar and wind energies
are other Somalilands natural energy resources which are yet to be exploited. According to
Somaliland investment guide, Somaliland has the world's highest electricity rates, at
approximately $1.00- 1.40 per kWh. According to Ministry of finance, 135,803.21 cubic meters
(90-100 thousand litres consumed per day)

of fuel was imported in 2013. The cost of which

equals the entire budget of the government. According to the ministry of planning, the higher
price of electricity or fuel prices have crippled the industrial sector of the country, making
electricity the most challenging issue in the private sector.

Apart from the absence of domestic fuel production, the primary causes of the high cost of
electricity are the high import taxes and storage

which currently stands $15.6 per barrel of

diesel and $18.6 per barrel of patrol). The absence of a government subsidy and the lack of
efficient fuel distribution further exacerbate the problem.
The other key challenges include lack of ability or willingness of the government to monitor and
prevent price fixing by companies supplying electricity. Moreover, market entry by new
companies has been made much difficult by the requirement to deposit large quantities of
fuel(about 640barrel of petrol and 780 barrel of diesel).
The high cost of electricity has forced most of the population to rely on charcoal, contributing to
faster deforestation and soil erosion in Somaliland. The impact of this environmental degradation
is manifested in droughts leading to scarcity of livestock fodder and hence falling livestock
exports. Livestock export is the back bone of Somalilands economy; according to the Ministry
of National Planning and development, livestock contributes 28% to the national GDP and more
than 90% of export earnings.
Somalilands consumption of imported fuel will remain a challenge to the Private sector
development until it becomes an oil producer itself. There has not been any remedial action
undertaken by the government to overcome this national problem.
Insurance
Apart from that imported goods outflow domestic currency to the foreign markets, the biggest
headache is the absence of Insurance. Ships carrying livestock exported from the country or
carrying imported goods into the country often capsize, resulting in multi-million dollar loses.
Due to lack of insurance availability, may businesses have to take the risk of heavy losses. This
constraint affects both import and export trades, the concerns were hold up by the appearance of
the piracy in Somali costal area which threatened the ships transporting to Somaliland, this lead
the business people to be charged higher shipment cost on their goods coming to Somaliland.
Provision of Insurance services is something that is desperately needed but can only be offered
through establishment of Insurance companies in the country or creating an attractive
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environment for foreign insurance companies to operate in Somaliland. Moreover, the absence of
National Insurance policy severely makes the issue very challenging. However, the lack of
Insurance discourages private sector as well as economic development; it leads Somaliland
entrepreneurs to face higher risks than the entrepreneurs in the rest of world.
Absence of internationally recognized Passport
The absence of Somalilands passport recognition from the rest of the world is another challenge
that undermines business sector development. Due to this, Somalilands business people have no
access to travel to International markets to perform their business operations or have business
relations with partners in other countries; this national tragedy leads business people being
isolated with less business cooperation with the rest of the world.
Many business people have connection with middle man (agents) instead of having direct contact
with their suppliers due to this informal travel sanction on this nation. Many businesses have
had disastrous relationship with agent; Ismail Siyad, who exports Myrrh from Somaliland to
International markets, argues that, traders are charged excessively by the agents, increasing the
cost of the commodities. There are many instances where agents ship wrong commodities or
something different to what has been ordered, or in some cases defective and malfunctioning
products. Unfortunately that is what is likely to happen when you are at the mercy of the agents
and have no way to make any claims. Sometimes agents misappropriate traders funds, forcing
them to suffer in silence as they have no recourse to the supplier or any legal representation.
Many businesses endeavors in purchasing commodities in the international markets fails at
payments stages. Inability to travel and meet face to face with suppliers coupled with poor
banking facilities makes international business extremely risky for Somaliland businesses.
Extremism and Terrorism
The spread of extremism violence has negatively impacted the Somaliland State, just like other
countries around the world. Although the 11 September incident was unforgettable business
disaster generally, the emergence of Al-shabab terrorist group in 2006 in Southern parts of
Somalia has inflamed international suspicion against many businesses and other organizations
operating in both Somaliland and Somalia. After 11 September, a number of companies were
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sanctioned by the USA and other governments, accusing them of having links with terrorist
organizations. Somalias Barakaat Company for money transfer was one of the largest
companies that have been shut down by the USA after the 11 September incident.
According to the Al-Jazeera, on 6thFeb, 2015, U.S. banks stopped money transfers to Somalia
because of strict regulations set by the Office of the Comptroller of the Currency over concerns
of money laundering and funding for terrorist organizations. Furthermore, some other countries
have raised their concern of Money transfer companies operating in their countries. Money
transfer is the only option which business people use for transferring and savings due to the
absences of banking system in the country. In addition to that, extremism crippled the tourism
sector after Somalilands Security level was lowered from 3 to 4-unreliavble-by the UN.As a
direct consequence of this degrading of security level, the UK and USA warned their citizens not
to travel to Somaliland and asked those already in the country to leave immediately. Neighboring
countries locked their borders with Somaliland for security reasons; Ethiopian airline suspended
its daily flights to Somaliland, seriously damaging commerce.DHL reduced its services in
Somaliland by restricting the items to be shipped out of the country.
Trade deficit
The domestic private sector in Somaliland has challenged imported goods and services. There
are plenty of goods and products which can be produced and processed in Somaliland and
countless products are imported while the domestic once are available or could be produced. The
Somaliland government and various private sector stakeholders have expressed their concerns
about these trends and the possible negative impacts on the vulnerable domestic production
sectors. For instance, the back bone of Somalilands economy is livestock and yet almost all the
milk consumed by the nation is imported. According to the ministry of Finance2013 report,
4,614,025Kgs of Milk powder and 3,424,460litres of fresh milk was imported and consumed in
Somaliland.
Eggs and poultry meat are also imported from different countries including Yemen and Ethiopia.
Although poultry is a potential domestic production, there are few poultry farms in the country
which are not able to satisfy local market demand. Lack of experience in poultry raring and

poultry specialists, and the unrestricted importation of poultry products made the sector
unproductive.
Somaliland possesses rich fish resources along its 850 km coast length, according to Guiled
Ahmed 2004. The maximum potential catch that could be harvested from Somalilands marine
resources is estimated to be between 90-120 tons a year, but currently less than 5% of this
quantity is harvested by Somalilands fishermen. According to ministry of finance, in 2013,
377,774 KGs of fish was imported and only less than 1% of Somalilands population is currently
engaged in the fisheries sector. Lack of appropriate infrastructure and expertise, ice, freezing and
cold storage facilities are the main problems restricting production, processing and marketing
opportunities of fish and other marine products.
Somalilands trade deficit is a direct result of unrestricted imports by the private sector of
practically any product with demand, rendering the private sector just customers of other
countries. Although globalization and rapid technology improvement has leashed domestic
production competitiveness, there are plenty of opportunities in Somaliland private sector.
Conclusion
The private sector has managed to survive and operate with a certain resilience, though by no
means as promising as it is portrayed. Developing a strong and healthy private sector is
necessary for Somaliland to develop a diversified and resilient market economy with rising
living standards.
Although geopolitics in the region, absence of proper banking system and the lack of
international recognition are the challenges of the Somalilands private sector, the higher price of
energy is the main and most challenging factor facing the sector which undermines the overall
development of the country. These issues have a negative development impact, and they
represent the main underlying causes for the stunted growth of Somalilands private sector and
its domestic production.

References
Ministry of Finance, (2013) Annual Statistical Report on Trade and Finance
Bekkin (2007) Somaliland - Interest free but not yet Shariah-compliant economy
An Investment Guide to Somaliland

Opportunities and Conditions 2013 2014

Gulaid, Ahmed H. O. (2004), Feasibility Report on the fisheries Sector in Somaliland

An Investment Guide to Somaliland Opportunities & Conditions 2013 2014
World Bank (2012) Doing Business in Hargeisa
Ministry of National Planning & Development (2011) Somaliland National Vision 2030
Asenka Asenova (2006) Feasibility of the German-type model of Universal Banks in the PostCommunist Economies
http://siteselection.com/ssinternational/2012/aug/africa.cfm
www.SomalilandInvest.net
http://www.worldbank.org/en/news/press-release/2014/01/29/new-world-bank-gdp-and-povertyestimates-for-somaliland

http://america.aljazeera.com/opinions/2015/2/us-banks-seek-to-destroy-somalia-economy.html

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