Somalia - Recent economic developments and current prospects (Vol. 2 of 2) : Annexes

Report No. 702-SO Somalia: Recent Economic pr2tE CP1 Developments and Current Prospects (In Two Volumes) Volume II: Annex I - Public Finance Annex 11 - The Agriculture Sector Annex Ill - The Livestock Subsector Annex IV - Planning and Public Management August 20, 1975 Eastern Africa Region Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This document has a restricted distribution and may be used by recipients only in the perforniance of their official duties. Its contents may not otherwise be disclosed without World Bank/IFC authorization.  EQUIVALENTS Currency The basic monetary unit is the Somali Shilling. So. Sh. 7.51881 = SDR1 So. Sh. 6.295 = US$1 Weight All weights are expressed in kilograms and metric tons. Length and Area All lengths are expressed in kilometers and areas in square kilometers or hectares.  ANNEX I Page 1 SOMALIA: PUBLIC FINANCE I. SUMMARY OF FINDINGS Past Achievements, Present Issues, and Future Strategy 1.01 During the last five years the Somali Government has focussed its attention on economic development through as much self-reliance as possible. Perhaps in no other field as in public finance are its achievements in respect of this goal so noteworthy. Table 1 summarizes the major achievements with respect to fiscal policy since the Revolution. 1.02 The Government has consistently raised its development spending even though it had to depend upon very substantial assistance from abroad. [t has attempted to and succeeded in generating larger budgetary savings year by year and carried ou.-, among others, the most unusual of austerity measures as the absolute cuts in the salary levels of its employees in 1970. This measure alone reduced the size of the current budget by 4% in 1971. 1.03 The Somali Gov"rnment has undertaken significant revenue-generating reforms since the Revolutioh. Important among-these reforms have been the imposition of an additional tax (called the 'Development Levy') on incomes from employment from non-government sectors at graduated rates, enactment of a turnover tax on public entities, and streamlining profit-shares accruing to the budget from the public entities. The combined contribution of these three measures is estimated to be 20% of total revenues in the 1974 budget. 1.04 The Somali Government has also revised certain rates of import duties upward, particularly on beer, liquor, gasoline, and footwear, and doubled the rates of both excise duty on sugar as well as stamp tax between 1969 and 1974. While the precise revenue effect of some of these measures is difficult to estimate, the fact remains that since 1969 the Somali Government has succeeded in abstaining 'from the use of inflationary finance on any major scale in the conduct of its budgetary policy. 1.05 However, the Somali authorities still have certain serious fiscal problems. Defense (and police) expenditures continue to absorb a very large proportion of the Government's current budget. The autonomous agencies or public entities, on which the Government has pinned its hopes for further resource mobilization for planned development, continue to defy its efforts. In addition, the Somali Government budget continues to depend very heavily upon foreign assistance and this, unless watched closely, could create serious debt service and creditworthiness problems in the long run. It is not only finance but also a shortage of skilled manpower which will be a severe cons- traint on the ability of the Government to further expand its development effort as proposed in its 1974-78 Plan.  ANNEX I Page 2 1.06 As it stands at present, the 'average' tax burden in Somalia seems heavy by international comparison (Table 2), 1/ so that it might be difficult to recommend to the Somali Government to further increase its tax effort. But the fact is that the country has adopted, by the Government's own admission, an extremely 'ambitious' Development Plan which, despite its heavy reliance on foreign assistance, is expected to call for additional domestic resource mobilization (Table 3). If, therefore, the Government desires to achieve the domestic finance targets of the Plan it will have to give top priority to mobilizing additional resources from existing taxable capacity (some of these possibilities will be indicated below) and at the same time completing the high-income-(or tax base)-generating and low-recurrent-expenditure (or savings) causing development projects. 1/ The only countries in Eastern Africa which appear to lead her in this comparison are the ones which have one or other 'precious' export commodity and/or have a higher per capita income. However, it must be mentioned here that GNP estimates of Somalia are not known and that the population estimates given in Table 2 might also not be accurate.  ANN4EX I Page 3 II. FISCAL PERFORMANCE SINCE 1969 2.01 Tables 4 to 6 provide the basic data for an evaluation of the fiscal performance of the Somali Government since the Revolution. Cert:ain trends emerging from the available data 1/ can be highlighted. Development Effort 2.02 To begin with, the Govertiment has stepped up its development effort significantly in recent years. Against a proposed development outlay of about So.Sh. 1 billion in its 1971-73 Plan (Table 3) the Somali Government has been able to achieve almost two thirds of its planned expenditure (Table 4). The development expenditure of the Government has grown from year to year -- by about 75% between 1971 and 1972 and about 55% between 1972 and 1973. 2/ 2.03 It is, however, apparent from Table 1 that foreign assistance- has played an extremely significant part in this development effort. Its contri- bution to development spending was 62% in 1971 and 75% in 1973. For the 1971-73 Plan as a whole, the contribution of domestic resources has been only 30% and this, as will be shown in Chapter III, is more due to thelbasic poverty of the country and inadequacy of the tax base and tax handles than a failure of the Government to make serious efforts to mobilize domestic resources. 2.04 The pattern of development spending during the last Plan periLod reflects the priorities of the Somali economy. Consistent with the needs of the country, the bulk of the resources was devoted to projects connected with road construction and transport development (29%) while agricultur;e and livestock (21%) and urban water supplies (16%) received the next large!;t amounts. Industry's share was much smaller (13%) and rightly so for the country was not yet ready for any substantial development of import- substitution industries. The 1974-78 Plan has modified these prioriti