Somalia - Policy measures for rehabilitation and growth

Report No. 4081a-SO FILE Copy f Somalia Policy Measures for Rehabilitation and Growth May 6, 1983 Country Programs Department Eastern Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Somali Shilling (So.Sh.) = 100 cents U.S. $1.00 Up to June 30, 1981 = So.Sh. 6.295 July 1, 1981-June 30, 1982 - A dual exchange rate with = So.Sh. 6.295 (for essential imports) = So.Sh. 12.590 (for all other foreign transactions) July 1, 1982 = So.Sh. 15.227 ABBREVIATIONS ADC - Agricultural Development Corporation CPT - (Mogadishu) Consumer Price Index DAC - Development Assistance Committee DOD - Debt Outstanding and Disbursed ECA - UN Economic Commission for Africa ENC - The National Agency for Trade FYDP - Five Year Development Plan (1974-78) MNP - Ministry of National Planning MOF - Ministry of Finance PIP - Public Investment Program TYDP - Three Year Development Plan (1979-1981) UNHCR - United Nations High Commission for Refugees GOVERNMENT OF SOMALIA FISCAL YEAR January 1 - December 31 This report is based on the findings of an economic mission which visited Somalia during April-May 1982. The mission consisted of Rajendra K. Sharma (Country Economist and Chief of Mission), Swadesh Bose (Senior Economist), Mohey Ragab (Debt Specialist), and Naimeh Had jitarkhani (Research Assistant). Robert Armstrong (Departmental Senior Economist) also contributed to the preparation of this report. The report was discussed with Somali authorities in October 1982 in Mogadishu and in March 1983 in Washington, D.C.  FOR OFFICIAL USE ONLY SOMALIA___- POLICY MEASURES FOR REHABILITATION AND GROWTH Table of Contents Page No. COUNTRY DATA PREFACE . ........................................................ i - ii SUMMARY AND CONCLUSIONS ........................ iii - ix PART I - CAUSES OF ECONOMIC STAGNATION AND FINANCIAL CRISIS .... 1 I. Introduction and Overview. 1 Structural and Institutional Characteristics 1 Recent Developments - An Overview. 4 Emergence of the Crisis. 4 II. Sectoral Developments and Constraints. 7 The Evolution of GDP by Sectors. 7 Agriculture. 9 Manufacturing and Processing .15 III. Causes of the Recent Crisis .20 The Public Finances .21 Money, Credits and Prices .24 The External Sector .26 External Debt .29 PART II - POLICY AGENDA AND PROSPECTS ............ ............... 31 IV. Recent Policy Changes ........................... 32 V. Next Steps in Policy Reform .35 Macro-Economic Management ..... .................. 35 Mobilization of Private Initiative and Resources. 42 Actions to Increase Agricultural Output and Exports .43 Measures to Raise Output and Improve Efficiency in Manufacturing .51 Public Sector Wages and Employment Policies 53 VI. Medium-Term Prospects .54 Foreign Exchange Prospects .55 Prospects for Public Finance .59 The Outlook for the Public Investment Program 62 Annex to Chapter 6 .64 STATISTICAL ANNEX .............................................. 68-125 MAPS .. 15413R and 16625 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   COUNTRY DATA Page 1 of 2 GNP PER CAPITA: US$280 (1981) 1/ CENTRAL GOVERNMENT FINANCE 1977 1978 1979 1980 1981 (Million So. Sh) Total Revenue 890 1420 1526 1421 2347 Current Expenditure 802 1362 1573 1618 2795 Current Surplus or Deficit (-) 88 58 -47 -197 -448 Other Expenditures2/ 820 1010 1671 1440 ... Overall Deficit 732 952 1718 1637 ... BALANCE OF PAYMENTS 1977 1978 1979 3/ 1980 1981 (Million US Dollars) (Provisional) Merchandise Exports (f.o.b.) 71.3 109.5 106.0 133.3 111.9 Merchadise Imports (c.i.f.)_/ -206.0 -275.2 -394.1 -461.5 -323.3 Trade Balance -134.7 -165.7 -288.1 -328.2 -211.4 Services, Net -6.5 -4.8 -11.7 -7.9 -8.2 Private Transfers, Net 13.1 78.1 35.9 57.3 32.2 Current Account Balance -128.1 -92.4 -263.9 -278.8 -187.4 Direct Investment 7.8 0.3 - - - Official Grant Aid 105.9 27.8 58.1 142.6 64.4 M&LT Capital (Net) 71.8 78.8 87.6 86.9 - Credit from IMF - - - 4.2 34.1 Short-Term Capital and Errors and Omissions -3.8 6.9 15.7 25.8 50.7 International Reserves (end year) 120.0 126.3 43.8 14.6 30.7 RATE OF EXCHANGE From 1973 to June 1981 - US$1.00=6.295 From July 1, 1981, Somalia had a dual exchange rate: US$1.00 = 6.295 (for essential imports) US$1.00 = 12.59 (all other foreign transactions) From July 1, 1982 - US$1.00.15.22 (unified) 1/ Based on tentative estimates of National Accounts recently prepared by the Bank staf f. 2/ Includes mainly development expenditure largely financed from external assistance. 3/ The import data for 1978 and 1979 include (but for previous years exclude) Franco Valuta imports.  Page 2 of 2 MONEY, CREDITS AND PRICES Dec. Dec. Dec. Dec. Dec. 1977 1978 1979 1980 1981 (Million So. Sh.) Bank Claims on Government (Net) -97.8 311.1 1,231.3 1,902.4 2,249.6 Bank Claims on Private Sector and Public Enterprises 1,280.7 1,404.6 1,725.8 1,977.2 2,296.0 Money Supply 1,325.1 1,728.0 2,335.2 2,783.2 3,674.0 (Percentage or Index Numbers) General Price Index (1977=100) 100.0 110.0 136.2 217.1 313.2 Annual Percentage Change in: General Price Index 9.8 10.0 23.8 59.4 44.3 Bank Claims on Private Sector and Public Enterprises 29.8 9.7 22.9 14.6 16.1 Money Supply 33.2 30.4 35.1 19.2 32.0 MERCHANDISE EXPORTS Average 1977-79 1980 1981 US$ Mln. % US$ Mln. %__ US$ Mln. % Livestock 71.2 74.5 101.6 76.2 97.7 87.3 Bananas 9.8 10.3 8.1 6.1 6.0 5.4 Meat and Meat Products 2.1 2.2 1.0 0.7 0.3 0.3 Hides and Skins 5.8 6.0 6.6 5.0 2.0 1.7 Fish and Fish Products 1.5 1.6 0.3 0.2 1.0 0.9 Others 5.2 5.4 15.6 11.7 4.9 4.4 Total 95.6 100.0 133.3 100.0 111.9 iO.0 EXTERNAL DEBT US$ Mln. Public Debt (Dec. 31, 1981)4/ 1,346.2 (of which disbursed) (906.9) DEBT SERVICE RATIO % Public Debt 1980 (estimate) 20.0 (incl. arrears) IDA LENDING (December 31, 1982) US$ Mln. Outstanding and Disbursed 107.7 Undisbursed 62.1 Outstanding inc. Undisbursed 169.8 1/ Excludes undisbursed commitments from East European countries, totalling US$154 million, which are riot expected to be disbursed any further. May 1983  PREFACE i. This report on the Somali economy was prepared in response to a request by the Government of Somalia for the World Bank to convene a consultative Group (CG) Meeting. The purpose of the CG meeting (the first such meeting for Somalia), tentatively scheduled for October 1983, is to discuss the most suitable strategy for the medium-term development of Somalia and to assist the Government in mobilizing resources for financing projects aimed at implementing this strategy. Thus, the present report is intended to serve as a document for discussion at that meeting. The Government of Somalia is also preparing a document for presentation at the CG meeting. ii. This report is based on the findings of an economic mission which visited Somalia in April-May 1982. The report, therefore, covers developments through the year 1981. The structure of the report is geared to arriving first at some conclusions about the nature of the binding constraints to Somalia's development, and then to deriving some recommendations concerning what actions need to be taken -- by both the Somali Government and the donor community -- to remove, or at least to relax, these constraints. iii. Per capita income in Somalia has not risen (and may well have declined) over the past twenty years. And notwithstanding the large volume of foreign aid made available, particularly since the mid-1970s, the country has in recent years been confronted by balance-of-payments and fiscal crises. Among the indicators of the economy's troubles in recent years have been: continued stagnation in production and exports; increased under-utilization of existing capacity; large budgetary deficits financed by recourse to the banking system; a high rate of inflation; mounting external debt; arrears in the servicing of this debt; and a decline in foreign exchange reserves to a critically-low level. iv. In 1981 and 1982, the Government introduced a number of significant policy measures aimed mainly at curtailing the excessive expansion of demand and at reducing both internal and external financial imbalances. As the report will describe, these measures have had some positive impact in terms of effecting stabilization objectives, and to a lesser extent in stimulating output. But they represent only a first stage in the formulation and implementation of a policy agenda which must be directed simultaneously at restoring financial equilibrium, rehabilitating and making fuller use of existing productive capacities, and at establishing the foundations of long-term growth. v. Part I of this report provides (i) a brief overview of past developments and (ii) a diagnosis of how and why the economy has experienced both stagnation and financial crisis. Part II comprises (iii) a description and evaluation of recent policy measures; (iv) an outline of the principal elements which should comprise a policy agenda for the future; and (v) some projections of Somalia's medium-term prospects, particularly with respect to the balance of payments. vi. It is of course recognized that much additional work, including in some cases much more refined analysis, will be required to shape new policy instruments and to translate the generally broad recommendations contained  - ii - in this report into time-specific action programs. This is a task in which the initiative should be taken by the Government. It is also an endeavor in which donors may be of great assistance. It is hoped that this report, and its discussion at the Consultative Group Meeting, may also serve to foster a greater degree of consensus amongst donors as to what most needs to be done and how donors may better coordinate their activities both with each other and with the Somali Government. Just as the Somali authorities may now be seen to be facing up to the shortcomings of their past policies and to be adjusting some policies accordingly, so should donors (including the World Bank) also now take stock, review the lessons of experience, reassess the implications of their on-going activities and prospective projects, and adjust their programs accordingly. vii. A few caveats should be borne in mind. The first is that in view of the limited time, manpower, data and documentation available to the mission, the report's scope of coverage and depth of analysis are limited and selective. The report therefore has little or nothing to say about many important issues, viz: trends in population growth and the need for intensified efforts in family planning; health, nutrition, education and other social sectors; infrastructural development; the structure of taxes and tariffs and the adequacy of tax administration; income distribution; and employment and wage structures. Some of these issues will be addressed in the World Bank's expanded economic and sector work program for Somalia. viii. A second caveat relates to the quantity and quality of the data reported in the Statistical Annex and text. The Somali statistical base is very weak on both accounts. Whereas the data concerning money, credit, and foreign exchange reserves may be deemed to be reasonably reliable, data concerning the national accounts, agricultural production, and even trade movements, the consumer price index, and budgetary accounts are highly incomplete and/or unreliable. The reader should therefore make due allowance for this fact. The mission is however fairly confident that, even allowing for some considerable margin of error, the basic diagnosis presented here is reasonably accurate. Nevertheless, more complete and reliable statistics are indispensable for performance monitoring and policy making. In particular, an "action program" is needed to produce more timely and accurate national accounts, commodity production data, public enterprise financial accounts, aid flows by end-use, and periodic reports on selected key indicators at the macro-economic, sectoral and project levels. Clearly, more technical assistance is needed in these areas, while at the same time there is a need to ensure that such assistance as is already being provided is used more effectively. ix. Finally, this report has been prepared at a time of particularly adverse developments in the world economy, in the international aid climate, and in the political situation in the Horn of Africa. This combination of circumstances makes an assessment of Somalia's economic prospects especially difficult. Partly for this reason, and partly owing to the considerations mentioned in the preceding paragraph, the projections presented in Chapter 6 must be regarded as especially tentative. And by the same token, the tasks confronting Somalia's economic policy-makers are rendered especially difficult. But the instability of these parameters does not mean that action on a new policy agenda should be deferred. Quite the contrary.  - iii - SUMMARY AND CONCLUSIONS i. During the past two decades, Somalia has experienced little or no improvement in per capita income, and since at least 1978 the economy has been in a state of financial crisis. The long-standing condition of stagnation in commodity production and exports persisted through the 1970s in spite of large inflows of foreign aid, relatively favorable terms of trade, and the achievement of a high level of investment. The recent crisis was precipitated mainly by political events, but the sources of this crisis, as well as of the stagnation in production, lay also in a number of domestic policy inadequacies. Among the principal indicators of the crisis were: a greatly-widened deficit in the current account of the balance of payments; a rapidly rising budgetary deficit financed by recourse to the banking system; a high rate of inflation; arrears in the servicing of external debt; and a drop in foreign exchange reserves to a critically low level. ii. Beginning in 1981, the Government has undertaken a stabilization program that has had some success both in restraining aggregate demand and in fostering increased production. Yet the measures taken to date represent only a first stage in the formulation of a new policy agenda which must be directed at maintaining productive capacities, and at establishing the foundations of long-term growth. As was stated in the Preface, Chapter 5 of this report identifies some of the principal components of a policy agenda geared to achieving these objectives. Causes of Stagnation and Financial Crisis iii. The stagnation in commodity production is mainly attributable to: (a) the overvaluation of the exchange rate which resulted in reduced incentives for exports and the underpricing of imports; (b) Government pricing and marketing policies which led to a sharp erosion of producer prices in real terms; and (c) an over-extension of public sector ownership and control of the economy in the face of the Government's limited managerial and administrative capacities. The proximate cause of the financial crisis was an explosion in demand emanating from the growth of Government expenditures far in excess of the growth in revenues. Government savings have been negative since 1979 while the overall budgetary deficit rose to the equivalent of 17 percent of GDP. The counterpart of the budgetary deficit was a worsening of the balance of payments, mounting external debt (to about 60 percent of GDP), a rise in the debt service ratio (from 3 percet in 1977 to 20 percent in 1980), and a widening of the resource gap from 4 percent of GDP in 1972 to about 15 percent in 1978.  - iv - iv. Although Somalia has pursued economic planning for well over a decade, the processes of economic planning and investment programming and budgeting have suffered from many weaknesses, viz: (a) past plans have not been formulated in a macro-economic framework, with the result that investment programs were prepared in a vacuum and were neither coherent nor consistent with national development objectives; (b) there is no mechanism for rigorously assessing resource availabilities and feasible levels of investment; (c) there has been no explicit linkage between annual budgets and the development plans, or between development and recurrent budgets; (d) the plans have not set forth well-defined strategies or policies to achieve the stated objectives, nor have they addressed adequately the country's limited absorptive capacity; and (e) the monitoring of plan implementation has been very inadequate. Moreover, too little attention has been given to assessing the prospective financial and economic costs and benefits of projects, with the consequence that numerous projects have been ill-conceived, poorly implemented, and have constituted a net drain upon the country's limited financial, manpower, and managerial resources. At the same time, private incentives and entrepreneurial initiatives have been inhibited from contributing fully to the country's development. Measures Taken, 1981-82 V. As the financial crisis evolved through 1978 and 1979, the Government gradually became convinced of the need to take remedial action. Beginning in early 1981, it embarked upon a program of policy reforms. The core of this program, which was supported by an IMF Stand-by Arrangement in mid-1981, comprised measures to adjust the exchange rate, to impose fiscal and monetary restraint, and to raise producer prices of bananas and agricultural commodities. The Government also decided to review the operations of the public enterprises and to introduce an upward adjustment of the interest rate structure. Following the completion of the 1981/1982 program in mid-1982, the Government adopted a new stabilization program with support from the IMF. Among the key measures of this program were: a unification of the exchange rate; continued restraints on overall credit and on net domestic credit to the Government; and a further increase of the interest rates, which however remain negative in real terms. The policy measures undertaken in 1981 and 1982 have already had some positive impact in terms of increasing the value of exports by 25 percent, reducing the budgetary deficit by 18 percent and domestic inflation by 50 percent, and, to a lesser extent, in stimulating production of bananas for export and of foodgrains for domestic consumption. Next Steps in Policy Reform vi. The Government has recognized the need to define and implement further measures of policy reform, and to that end it has requested the World Bank and IMF to assist it in preparing a detailed program for economic recovery. Work on this program is just now beginning, but the  - v - Bank's economic mission has identified the following areas of concentration for such a program. vii. Firstly, there remains the need to continue with the kinds of demand management measures that have helped to diminish the financial disequilibria of recent years, viz through continuing tight restraints on credit and monetary expansion and through improvements in balance of payments and external debt management. Secondly, as a key instrument of its overall economic management, a realistic and feasible Public Investment Program, emphasizing quick-yielding projects and programs to rehabilitate existing capacities, needs to be formulated. Thirdly, measures are needed to create investment opportunities and to improve incentives to private sector initiatives and resource mobilization, including steps to better mobilize savings of emigrant workers. Fourthly, there is an urgent need for the preparation of a medium-term program for raising commodity production, both for export expansion and import replacement. This should comprise a mixture of policy, procedural and institutional changes directed towards improving resource allocation and capacity utilization particularly in the agricultural and industrial sectors. The following paragraphs give a brief outline of some key elements of these recommended reforms. viii. In regard to budgetary management, the Somali economy is currently taxed heavily, and the scope for increasing revenues in the short- to medium-term, without adverse effects on incentives and output, is rather limited. However, the scope for improving tax administration and for reducing Government expenditures is substantial. The latter will call for the Government to make some hard choices in the allocation of budgetary outlays by (a) reducing allocations to ministries dealing with general public services vis-a-vis those engaged in providing economic and social services; (b) abandoning the policy of creating employment through both the guarantee of employment to high school leavers and the hiring of excessive numbers of workers in public enterprises; and (c) tightening expenditure controls and the public accountability of ministries and public enter- prises. ix. To date, too much of the burden of adjustment has fallen on development-oriented expenditure and not enough on other expenditures. Similarly, the country's credit policies need to better ensure that productive private sector investments and working capital are not unduly constrained by the diversion of credit within an overall credit ceiling, to less productive public sector uses, including the subsidization of uneconomic parastatal organizations and enterprises. To improve Somalia's balance of payments management, the most important need is for the Government to maintain an appropriate exchange rate, with particular reference to realizing a larger and better-directed flow of emigrant remittances. A recent decision to introduce a bonus scheme is a step in the right direction. The present multi-level system for the control of import trade, which is cumbersome and inefficient, needs to be streamlined  - vi - and rationalized, and a better system of foreign exchange budgeting need to be put in place. At present, production in both the public and private sectors is constrained by the lack of spare parts, raw materials, current production inputs and equipment. x. Somalia's external debt burden has reached a high level which a stagnating economy cannot bear. The Government and the donors alike must be mindful of Somalia's ability to service even loans made on highly concessional terms unless the projects being financed are both economically viable on their own account and justified also in the context of realistic projections of the country's future debt servicing capacity. It would also be in the country's interest if the Government could persuade some of the creditors to convert their loans into grants and otherwise to maximize the grant element of future capital inflows. The Government on its part must improve its debt management procedures. Full powers and responsibility for external borrowing should be given to the Ministry of Finance and the staffing and supervision of the external debt unit in the Ministry of Finance should also be strengthened. xi. A variety of measures should be undertaken to strengthen the Government's planning, investment programming, and budgeting procedures and otherwise to increase the efficiency of resource allocation. One of the report's recommendations in this regard is that the Government establish a Resources Committee, consisting of high level representatives of the Ministries of Planning, Finance and the Central Bank, with responsibility to review and agree upon projected foreign and domestic resource availabilities as a framework for development planning, public investment programming, and annual budgeting. A key instrument for managing and monitoring the national development effort should be the formulation of a Public Investment Program (PIP). To formulate a realistic PIP, the Government needs to have project identification and preparation according to economic criteria, and estabish a core program of highest priority projects aimed at medium-term rehabilitation of existing productive capacity and maximum output benefits in the short run. xii. An important element of policy reform is the better mobilization of private initiative and resources. This will call for measures on several fronts, including: a clarification of policies defining the scope for private sector activity; a rationalization of tax, tariff, subsidy and pricing policies to improve incentives and make them more consistent with efficient resource allocation; a streamlining of bureaucratic procedures impinging on private sector activity; and a release of under-employed public sector staff to permit their engagement in higher-productivity private sector employment. A growth-oriented development strategy must also ensure that the vast majority of agricultural producers, who remain in the private sector, will have both adequate financial incentives for augmenting their output and better access to essential inputs, extension services, infrastructural facilities and credit. Moreover, in order to  - vii - remove uncertainties regarding the policies and intentions of the Government in the minds of prospective entrepreneurs, a clear statement of policy in regard to the encouragement of private sector activity is essential. In recent years, a number of Somali traders have accumulated considerable capital, and some appear keen to venture into construction, manufacturing, tourist services and even commercial agriculture. In order to harness the energies and resources of these prospective entrepreneurs, as well as those of foreign investors, a clearly-enunciated industrial and investment policy should be formulated and pursued. xiii. The main elements of an action program to increase agricultural output and exports should cover all the important subsectors. In crop production, priority should be given to measures designed to increase production relatively quickly and at low investment cost. These should broadly include rehabilitation of irrigation facilities and improvement of water management in the controlled irrigated areas. In rainfed areas, emphasis should be given to rehabilitation and intensification measures designed to achieve better land preparation, improved seeds, better plant density, and improved post-harvest technology. Steps should also be taken to improve the efficiency of state farms. And most importantly, insofar as the dismal past performance of commodity production was in large part due to inappropriate exchange rate and pricing policies, it is essential that the Government actively adjust its exchange rate and producer prices so as to restore and maintain adequate financial incentives to producers. More specifically, producer prices should be maintained close to import parity prices and these producer prices should be periodically revised to take account of changes in import prices, costs of production, and changes in other prices in the economy. There is also a need for reform in the present crop marketing and distribution arrangements. In particular, ADC's legal monopoly of grain purchases should be eliminated and farmers given freedom to sell in the open market. xiv. In the livestock sector, high priority should be given to activities having an immediate impact on production and export and should aim to increase the productivity of past investments. High priority should be given to improving animal health and market infrastructure, including through measures to provide a more regular and adequate supply of drugs along stock routes and in holding areas as well as through improved health services and other facilities at shipping points. Measures should also be taken to remove bottlenecks in transport and shipping, and to improve port facilities and holding grounds important to export marketing. In view of the importance of livestock exports in the balance of payments, it is essential that the effective exchange rate to livestock exporters be maintained at a level sufficient to encourage the exportation (vis-a-vis the domestic consumption) of livestock. In the fisheries sector, there is considerable potential for increasing output and exports. In addition to recent measures for supplying fishing vessels to individual fishermen and encouraging foreign companies to seek equity participation in commercially-  - viii - oriented ventures, steps need to be taken to: (a) develop on-shore marketing and infrastructure facilities; (b) assist fishermen in acquiring needed supplies (boats, gear, credit, etc.); (c) introduce training programs geared to assist artisanal fishermen in increasing their productivity; and (d) protect deep-sea fishing that proves successful, to avoid an over-exploitation of the fish resources. xv. In the manufacturing sector, where agro-processing is the dominant activity, the first priority action is to raise agricultural output through the measures described above, since the agro-industries cannot operate at full production without an adequate supply of inputs. The task of improving the operative efficiency of industrial public enterprises should receive Government's immediate attention. In this regard, the pricing policies followed by these enterprises should be rationalized. High priority should also be given to the allocation of foreign exchange to finance the purchase of imported materials -- spare parts, fuel, and other current inputs. In case of some public enterprises, the Government has to face the difficult choice between shutting them down or subsidizing them - whether directly or indirectly - indefinitely. Some may perhaps be made viable through selective balancing, modernization and rehabilitation programs. In other cases, the Government must avoid the danger of throwing good money after bad in expensive new undertakings to validate what are inherently uneconomic ventures. An action program for public enterprises should include the introduction of substantial enterprise-level autonomy with regard to output pricing, wage, employment and production decisions. Medium-Term Prospects and Aid Requirements xvi. The task of making any quantitative projections of Somalia's economic prospects over the medium-term is rendered especially difficult by the deficiencies of Somalia's statistical data and by uncertainties about future policies and programs. Notwithstanding these limitations, Chapter 6 of this report presents one scenario that is based on somewhat arbitrary assumptions about prospective resource availabilities, external market conditions, and internal policy changes. In view of the strong market for live animals in Saudi Arabia and Somalia's special arrangements for sale of bananas to Italy, it is envisaged that moderate growth in the volume of exports would be realized so long as appropriate effective exchange rate policies are pursued. It is further assumed that there will be no deterioration in Somalia's terms of trade. However, the balance of payments will remain under considerable pressure for the foreseeable future, given the huge gap in the present trade balance and the lack of viable export diversification projects which can be developed in the short-to-medium run. Domestic savings are now extremely low (if not negative) and since the tax burden is relatively high, the prospects for financing the local currency component of increased development expenditure, without excessive deficit financing, will in large part  - ix - be a function of the Government's ability to reduce non-economic recurrent expenditures. National savings can however be raised substantially by measures to increase the flow of remittances and to direct them to investment rather than consumption use. xvii. In the near term, increased production will have to come from mainly better utilization of under-utilized capacities. In this regard, there is evidence that during the past two years, Government efforts to improve incentives have led to increased production and exports. If the Government formulates and implements a well-designed Medium-Term Recovery Program, there are good prospects for GDP growth to accelerate in the medium-term. In making its projections in Chapter 6, the mission has assumed that many of the policy reform measures outlined in the report would be implemented in the near future, and a GDP growth rate of 3.5-4 percent per annum is envisaged for the period 1982-86. Without a program of policy reform, growth will likely be lower, whereas a sound recovery program, implemented with vigor by the Government and supported by the donor community, might well lead to higher growth. The current account deficit of the balance of payments is expected to average around $300 million per year over this period, equivalent to about 15 percent of the roughly-estimated GDP. This would imply that disbursements of foreign aid would be maintained at about the current level. In any event, these very rough projections are being revised by a joint Bank/Fund mission, which will in mid-1983 reasess Somalia's medium-term macro-economic and financial prospects. However, it is evident that over the foreseeable future, Somalia will have to continue to depend very heavily on foreign aid to finance its investment program.   PART I: CAUSES OF ECONOMIC STAGNATION AND FINANCIAL CRISIS CHAPTER 1: INTRODUCTION AND OVERVIEW Structural and Institutional Characteristics 1.01 Somalia is a large, sparsely-settled country. Its population of some 4 1/2 million people1/ is unevenly distributed over a land area considerably larger than that of France. Somalia's varied topography includes a hot and arid coastal plain, rugged mountains and plateaus, and lowlands of varying fertility and rainfall. Only 13 percent of the land is said to be arable, but with water the limiting constraint, only a small fraction of this potentially-arable land is, in fact, cultivated. 1.02 About 60 percent of the labor-force are nomads and semi-nomads who depend on livestock for their livelihood; about 20 percent are farmers cultivating land along the Juba and Shebelli rivers and in the higher-rainfall Bay and North-west regions; the other 20 percent are engaged in various non-agricultural occupations. Livestock production accounts for about 35 percent of GDP and provides over 80 percent of export earnings. Crop production generates about 8 percent of GDP and roughly the same share of exports. Rainfed crop production is based primarily upon sorghum. Crop production under controlled irrigation is centered on bananas (the principal cash crop and the second largest export commodity), sugarcane, rice and maize; production under flood irrigation comprises mainly maize and sesame. Notwithstanding Somalia's 3000 km. coastline, fishing generates only about 2% of both CDP and employment. 1.03 Somalia is amongst the poorest countries in the world and is classified by the United Nations as a least-developed country. Per capita income was estimated to be below $300 in 1981. Other indicators of the country's low level of social and economic development include: a crude death rate estimated at 20 per thousand population (compared to a crude birth rate of 46 per thousand); an average life expectancy of only 44 years; an infant mortality rate as high as 150-160 per thousand population; 1/ Not including refugees. The population figures are disputed. According to preliminary results of the 1975 census, Somalia had in that year a population numbering 3.7 million. Since the population is estimated to have been growing by 2.5 - 3 percent per year, the total 1982 population is estimated at 4.6 million. According to Somali authorities there was an under-enumeration of 150,000 households (accounting for about 700,000 people) during the 1975 census. This matter is being looked into by United Nations demographers whose report is near completion. If an under-enumeration of this magnitude were to be confirmed, the 1982 population estimate would be revised upwards to as many as 5.5 million. The 1981 refugee population (not included in the above figures) was estimated at around 700,000; this figure is also disputed.  -2- primary and secondary enrollment ratios of 50 percent and 7 percent, respectively; and a ratio of nearly 20,000 persons per physician. 1.04 The structure of production has changed significantly since the Somali Democratic Republic gained independence in 1960. Between that year and 1978, according to available estimates, the share of agriculture in GDP fell from 68 percent to 51 percent, the share of industry remained the same at 13 percent, while the share of services rose from 19 percent to 36 percent.2/ In relative terms, the sharp increase in the share of services, reflecting mainly the doubling of public sector employment in the 1970s, was the most notable change. This was reflected on the demand side by a more-than doubling of the share of public consumption in GDP. 1.05 In the 1960s and early 1970s, although some infrastructure was established, savings and investment rates and the productivity of the productive sectors remained low, and output and exports stagnated. Following the revolution in 1969, however, there was a marked change in the institutional and policy framework. In pursuit of its goals, the Goverrment greatly extended public sector ownership of and control over the economy. Banking, insurance, wholesale trade and agricultural marketing (excluding livestock) were brought under public sector management, and pervasive direct economic controls replaced market mechanisms. The spread of cooperatives was encouraged by various preferential policies. The parastatal sector now includes some 45 enterprises. 1.06 While the Government's intent was that these enterprises would serve as instruments of resource mobilization and economic control, they have not been successful in generating savings. Their financial losses have become a major drain on the budget, and their inefficient operation has given rise to much of the growth in bank credit which fueled Somalia's high inflation rate in the late 1970s and early 1980s. 1.07 A central theme of this report is that many of the measures undertaken during the 1970s to expand public sector ownership and control over the economy have tended to erode incentives to effort and improved productivity in both the public and private sectors, and that this erosion has been a principal cause of stagnation in production. It should be emphasized, however, that whereas public controls may appear to have become pervasive, it is only in the manufacturing and service sectors that public sector ownership and employment are dominant. Livestock production has remained entirely in private hands, and state farms currently occupy about 3 percent of the area under crop production. At the end of the 1970s, it was estimated that about 30 percent of GDP was generated in the public sector: 25 percent in government administration and 5 percent in state-owned enterprises. There are some indications that the Government has begun, particularly in the past year or so, to exhibit a greater 2/ The reader may be reminded of the caveat, mentioned in the Preface, about the lack of reliability of the data upon which such estimates are based. When such figures are not rounded, it is safe to assume that the presumed accuracy is spurious. The excuse for not rounding in cases like the present one is that shares of a composite should add up to 100%.  - 3 - tolerance (if not an active encouragement) to private sector activity in the rural areas. The formal and legal framework of state control has been amended only slightly, but certain changes in administrative practices are seen by some to represent evidence of a more "permissive" policy environment. Among the examples cited are the reduced role of the agricultural marketing monopoly and a more relaxed government policy concerning the leasing of lands to private individuals or companies. 1.08 The Government has recently avproved the final version of a Development Plan for the period 1982-86._/ Somalia has pursued economic planning for well over a decade, and in the process several plans have been prepared. The Five-Year Development Plan (1974-78) and the Three-Year Plan (1979-81) were essentially public sector investment programs that allowed for only a few small private ventures. Although these plans provided an intended framework for the allocation of investment, they did not in fact play a significant role in the allocation process. Despite the Government's initial intentions, industry, mining and infrastructure received more public investment than agriculture. By and large, the actual allocation of public investments was influenced by the preferences of aid donors who in many cases identified, prepared and financed projects of their own choosing. The shortcomings of the planning process are discussed in some detail in Chapter 5. 1.09 Somalia has made considerable progress in meeting some basic needs. For example, a program of literacy and primary education has had notable results. Between 1969 and 1978, the primary school enrollment ratio rose from 9 percent to 44 percent, and the adult literacy rate rose from a negligible level to an estimated 60 percent.4/ A system of emergency food distribution was also established. In other respects, however, the record in the social sectors has been less impressive, particularly in water supply, sanitation and health where services have frequently been biased in favor of the urban population. Moreover, there are indications that there has been a trend towards increasing income differentiation within the rural sector.5/ In view of the decline in real wages of (largely urban) government employees which occurred in the 1970s, it is not clear whether or not there was increasing income differentiation as between the urban and rural populations. 3/ The mission did not receive a copy of the final plan in time to evaluate it in this report. However, in Chapter 5 the report does comment upon certain aspects of an earlier draft of the plan, as well as upon the planning process in general. 4/ Official estimate. The dramatic increase in adult literacy was achieved through a crash program in the mid-1970s; retention rates are not known. 5/ See Annex IV, Somalia: Agricultural Sector Review, Vol. III (IBRD Report No. 2881a-SO, June 1981).  -4- Recent Developments -- An Overview 1.10 Available indicators on production suggest that between 1972 and 1978, Somalia's GDP increased in real terms by about 2.8 percent a year, i.e. at approximately the same rate as population growth. Owing to variations in the weather and to other, essentially exogenous factors (described below), the year-to-year growth of output varied considerab:Ly, with probably little or no growth having occurred in 1979-80. On average, however, the annual growth in the productive sectors was only about one percent a year, while in the services sectors it was nearly seven percent, reflecting to a large extent increased Government employment. Within the productive sectors, the average annual growth was 2.7 percent in livestock, minus three percent in crop production, and minus two percent in industry. A modest upturn in crop production occurred during 1981, mainly due to an unusually favorable rainfall which stimulated the output of sorghum and maize, and partly owing to the improved incentives provided by increased producer prices announced and made effective in April 1981. The growth of other sectors, however, continued to be stagnant. 1.11 The 1970s witnessed relatively rapid increases in both publ:ic consumption (for reasons noted earlier) and gross domestic investment, which rose from about 10 percent of GDP in 1970 to around 16 percent by 1978. But with domestic savings declining during the 1970s, it was foreign aid which financed most of the increased investment. A substantial part of the aid inflow was also utilized for consumption, both to offset the effects of the 1974/75 drought and in support of the refugees created by the conflict in the Horn in 1977/78. The fact that output was by and large unresponsive to this stepped-up investment points to both the inherent weaknesses of Somalia's absorptive and project implementation capacities as well as to the dubious economic viability of many of the projects undertaken. 1.12 The decline in crop production noted above, and the even-steeper decline in marketed production, had its effects also on the balance of payments. Food imports (excluding food for refugees) increased multi-fold, while at the same time the volume of banana exports fell sharply and livestock exports stagnated. The rapid rise in food, capital goods and other imports in the 1970s in the face of declining exports was of course reflected in a greatly enlarged resource gap, which rose from the equivalent of some 4 percent of GDP in 1972 to 15 percent by 1978. Emergence of the Crisis 1.13 Notwithstanding the increase in external debt which accompanied the foreign financing of this growing resource gap, Somalia's debt servicing burden remained quite manageable through the mid-1970s. Indeed, through 1977, the overall balance of payments position remained comfortable owing to the sharp rise in official (largely concessionary) aid flows. Disbursements from foreign grants and loans rose from $57 million in 1972 to almost $200 million (over $50 per capita) in 1977. During the same period, total foreign reserves increased steadily, from $31 million to $120 million -- equivalent to over seven months of recorded imports at the 1977 rate.  -5- 1.14 The budgetary position was also satisfactory through 1977 insofar as the Government was maintaining a net creditor position with the Central Bank. This fortuitous situation was also facilitated by the large aid inflows, which in budgetary terms were equivalent to 150 percent of the overall budgetary deficit. 1.15 The turning point for both the budget and the balance of payments was in 1978, precipitated by the 1977/78 border conflict with Ethiopia. The conflict had two immediate consequences: Government expenditures, mainly for defense (but also for refugee care and other purposes) and the overall budgetary deficit rose sharply (i.e. by about 30 percent in current prices) while at the same time foreign financing of the budget fell by 40 percent (also in current prices). And although foreign financing was resumed at a high level in 1979-80, the financing gap widened dramatically in 1979 and remained at a very high level in 1980. The consequence was that deficit financing by the banking system grew from So.Sh. 409 million in 1978 to So.Sh. 920 million in 1979 and was estimated at So.Sh. 671 million in 1980. (The relative size of the deficit financing in 1979 is indicated by the fact that So.Sh. 920 million was equivalent to 60 percent of domestic revenues and over 10 percent of GDP.) This led to sharp increases in the money supply and in the rate of inflation, which rose from 10 percent in 1978 to 24 percent in 1979 and to 59 percent in 1980. 1.16 The balance of payments counterpart of these budgetary developments was a surge in imports in the years 1978-80, accompanied by poor export performance and by (temporarily) reduced capital flows (especially marked in 1978, after aid from the USSR had ceased and before other donors stepped up their aid). Hence, although total foreign reserves actually increased in 1978, they declined rapidly in 1979 and 1980. By the end of December 1980, foreign reserves had fallen to about $15 million (about two weeks' imports); they were subsequently restored to a level of $31 million at end of 1981, but had dropped to $7 million in August 1982. Other indicators of the crisis included a rapid rise in the debt service ratio over the period 1978-80 and an accumulation of $28 million in arrears by the end of 1980 -- an amount equivalent to 25 percent of 1981 (recorded) merchandise exports. 1.17 In January 1980, the Government entered into its first stabilization program with the IMF. That program soon lapsed when the Government proved unable to conform to the agreed-to ceilings. In July 1981 the Government entered into a new one-year standby program and was able to keep within the established ceilings. In July 1982 it embarked upon a third, 18-month stabilization program. Partly as a consequence of the Government's policy measures and partly owing to good weather and other factors, the 1981 budgetary deficit and rate of credit expansion were substantially reduced, the rate of inflation dropped to 44 percent, the current account deficit in the balance of payments was substantially reduced, and the Government was able to simultaneously pay off some arrears and increase slightly its foreign exchange reserves. These improvements were however achieved partly at the expense of a drastic curtailment in development expenditure, a 40 percent decline in imports of investment goods, and the curtailment of other imports needed to utilize capacity and promote development.  -6- 1.18 The foregoing overview of main developments in the Somali economy has been essentially descriptive. A somewhat more detailed review of what happened and a diagnosis of the principal causes of the economy s long-term stagnation (and in some cases decline) are provided in Chapter 2. Similarly, a diagnosis of how and why the fiscal and balance of payments crises came about in the late 1970s is the subject of Chapter 3. Chapter 4 describes and discusses the significant policy measures undertaken in conjunction with the IMF Standby programs approved in 1981 and 1982. These measures which included actions aimed at both curtailing demand and stimulating output in the short run, have been both significant and substantial. Yet it should be evident, even on the basis of the brief review already provided, that Somalia is still far from having achieved either the requisite stabilization and control on the demand side or the rationalization of incentives and improvement in economic management needed to put the country on a medium-to-longer run growth path. 1.19 Chapter 5 purports to propose, on the basis of the preceding diagnosis, a number of such measures, both substantive and procedural, with emphasis on the supply side. This emphasis reflects mainly a recognitiLon that the financial crisis which began in 1978 is a relatively recent phenomenon which was superimposed upon an economy which had been stagnating for many years. Hence, whereas the restoration of financial equilibrium is surely a necessary condition for the economy's future growth, it is not a sufficient condition. The fundamental constraints to growth are rooted in the country's structural characteristics, in its incentive system, and in the deficiencies of an allocation process which, despite relatively high level of public resource mobilization (reflected in both the tax rates and the aid per capita figures), has failed to generate much real output in the public sector or to foster much production in the private sector. Hence, the central focus of Chapter 5 is upon the possible ways and means of overcoming these constraints. Chapter 6 then briefly considers Somalia-s medium-term prospects.  -7- CHAPTER 2: SECTORAL DEVELOPMENTS AND CONSTRAINTS The Evolution of GDP by Sectors 2.01 Although Somalia-s national accounts indicate that overall GDP growth in the 1970-s averaged about 2.8 percent per annum, i.e. roughly the same rate as population growth, it should be re-emphasized that commodity production and value added in the productive sectors grew much more slowly--by only about one percent per year. On the other hand, the reported growth of the services sector was quite substantial--over six percent for all services and about nine percent for government services. Table 1 below shows the evolution of GDP at factor cost in the main sectors for the period 1972-1978. Comparable national accounts data for 1979-1981 are not yet available, but partial production and other indicators suggest that the growth of the main sectors in 1979-1980 has not been much different from the 1972-78 period. In 1981, however, good weather was the main factor accounting for a substantial increase in value added by the crop sector. Table 1: ESTIMATES OF GDP AT FACTOR COST, 1972 AND 1978 (At Constant 1970 Prices) Average Annual % of GDP Growth Rate 1972 1978 in 1978 1972-1978 (So. Sh. Million) % Productive Sectors 1,544 1,627 63.7 0.9 Agriculture Sector 1,180 1,305 51.1 1.7 of which: Livestock 713 837 32.8 2.7 Crops 294 247 9.7 -3.0 Other 173 221 8.6 4.2 Industrial Sector 364 322 12.6 -2.0 of which: Manufacturing 222 212 8.3 -0.8 Construction 106 70 2.7 -6.5 Other 36 40 1.6 1.7 Services Sectors 626 929 36.3 6.8 Government Services 178 297 11.6 8.9 Other Services 448 632 24.7 5.9 Total GDP at Factor Cost 2,170 2,555 100.0 2.8 Source: Statistical Annex, Table 2.2  - 8 - 2.02 While the main focus of this chapter is upon the causes of stagnation in the commodity production, it may be appropriate to set forth, first, a few observations concerning the services sectors. There was undoubtedly a substantial expansion in private trading activity after 1976 associated with the franco valuta system.'/ The trading sector as a whole was also stimulated by outlays financed by the large inflow of foreign aid. As a result of these factors, it was possible for the private services sector (including land transport, which has remained largely in private hands) to expand, even while commodity production was stagnating. 2.03 At the same time, there was rapid growth in government services. Some of this growth was associated with the provision by government of 'real' services, including those related to the provision of basic needs, management of the refugee burden, and .-xpansion of public investment. But in view of a government policy which obliged the public sector to guarantee employment to all secondary school leavers2/ who seek public sector employment, it must be questioned to what extent the reported 'value added' of many of these employees represents the production of 'real' services which improved the nation's welfare.3/ There is considerable evidence of overstaffing in both the Government administration and the public enterprises. During the 6-7 years in which the number of public service employees was doubling, the real, after tax incomes of these employees were falling by as much as 50 percent, with a consequent adverse effect on morale, effort and productivity. The average productivity of public sector employees was also depressed by the related migration of skilled and professional workers to the Middle East. No official data concerning the stock or flows of Somalis working abroad are available. According to unofficial "guesstimates", the total number of Somalis 1/ Under the franco valuta system, which emerged in 1976 as a means of encouraging Somalis working abroad to remit their earnings, importers who obtained foreign exchange from outside Somalia were automatically granted licenses to import certain commodities. Over the years, an increasingly broader range of commodities, including luxury consumer goods, were permitted to be imported under the system. As a result of this liberalization, most franco valuta imports, which rose from only $3 million in 1976 to a peak of $76 million by 1978, were marketed directly by private traders. Issues relating to the system and its abolition in 1981 are discussed briefly in Chapter 4. 2/ Until 1979, this included intermediate school leavers as well. 3/ According to a 1979 manpower survey, public sector employment (excluding the armed forces) rose from 35,000 to 73,000 between 1971 and 1978. Ministry of Finance data indicate an increase in central government employment (also excluding the military) from 26,000 in 1974 to 54,000 in 1980. The national accounts show an increase of 50 percent (in real terms) in the value added by government services in 1978 alone.  - 9 - (mostly unskilled) working overseas is thought to have risen from perhaps 40,000 in 1976 to around 70,000 in 1980. 2.04 The scarcity of trained and experienced managerial and technical cadres in Somalia is of course a fundamental constraint to the country s development. It is a central part of our diagnosis that, in the face of this scarcity, the Government was trying to manage too many tasks simultaneously, with the results that: the gap between the supply and demand of managers, entrepreneurs, and skilled workers and technicians widened rather than narrowed; human resources were spread thinly rather than concentrated into 'critical masses of talent and experience focussed upon a limited number of most essential tasks; the number of public policy objectives outstripped the number of well-designed policy instruments employed; the performance of the bureaucracy and the state-owned enterprises deteriorated rather than improved; and that incentives to effort and output in the private as well as public sector were thereby eroded. This last point is indeed a main explanation for the particularly disappointing performance of the agricultural sector. Agriculture 4/ 2.05 Agriculture occupies a predominant position in the Somali economy. More than 80 percent of the population depends largely on agriculture (including livestock, crops and fisheries) for their livelihood. The livestock subsector is the principal generator of income and employment, the major foreign exchange earner (accounting for over 80 percent of total export receipts), and a provider of both food for domestic consumption and inputs for the meat packing, hides and skins and leather industries. About 500,000 families are engaged in livestock production and about 200,000 in cropping, the latter largely on small, family-owned farms. State farms account for only a small share of the total cultivated area (23,600 ha out of 700,000 ha in 1981). The fisheries subsector comprises two distinct parts: (i) artisanal fishing in the inshore waters, which accounts for most of the fish landed in Somalia (4,000 to 11,000 tons annually); and (ii) deep sea catches operated by foreign crews who do not generally land their high-value catches in Somalia, but tranship them back to their home countries for processing and marketing. Such vessels are now licensed by the Government in return for a 20 percent royalty on the catches. 2.06 The growth of value added in the livestock subsector, estimated at 2.7 percent per annum between 1972-1978, was achieved despite the 1974-75 drought which resulted in large-scale depletion of the national herd. Subsequent years of good rainfall helped to rebuild the herd to the 1972 level by 1978. The raising, marketing and export of live animals is entirely in the private sector. Livestock prices are not subject to 4/ A fuller description of trends in Somalia's agricultural development, a diagnosis of constraints thereto, and recommendations for future policy action are set forth in World Bank Report No. 288la-S0, Somalia: Agricultural Sector Review (in three volumes), June 1981.  - 10 - Government control and have generally kept up with inflation. A large and growing market in neighboring Saudi Arabia has also been a major factor in sustaining the growth of the subsector. 2.07 The main constraints to the growth of the livestock sector have been: (i) the vulnerability of livestock production to periodic droughts; (ii) the limited capacity of the rangelands to sustain a larger herd, as evidenced by the lower productivity being achieved on the more marginal lands, especially since the Ogaden lands are no longer open to Somali herders; (iii) an overvalued exchange rate which diminished incentives to raise offtake rates; (iv) the lack of veterinary services as reflected. in the poor health and high mortality of the animals; and (v) the inadequacy of the marketing and shipping infrastructure, most notably at Berbera. In 1981, notwithstanding the exchange rate adjustment made in that year, the imposition by the Government of a 25 percent tax on livestock exports, plus the prohibition of the previously-allowed underinvoicing of these exports, proved to have a net disincentive effect on livestock exports. The effective tax has since been reduced by changing its base. 2.08 About one-fifth of the population is engaged in crop production, of which about 80 percent is on subsistence basis. Crop production accounts for about 10 percent of GDP and its contribution to export earnings ranged from 17 percent in 1976 to about 5 percent in 1981. In addition to the staples (sorghum and maize), the main crops are bananas (a major export crop), oilseeds, sugarcane, cotton, rice, fruits and vegetables. Only a small proportion of the cultivable area is currently utilized for growing crops, owing both to the lack of infrastructure and the cultural resistance among the nomadic population to sedentary agriculture. The crop production subsector was characterized by particularly poor performance in the 1970s. Food and industrial crop production stagnated between 1972 to 1980 and there was a severe drop in banana and sugarcane production. Table 2: PRODUCTION OF SELECTED AGRICULTURAL CROPS 1972 and 1977-81 (In thousand tons) 1972 1977 1978 1979 1980 1981 Foodgrains 268 265 261 262 268 372 Bananas 189 65 70 72 60 69 Sugarcane 401 320 312 265 420 378 Other Industrial Cropsl/ 47 47 46 47 45 30 1/ Includes sesame, groundnuts and cotton. Source: Statistical Annex, Table 7.1  - 11 - 2.09 A critical factor in the poor performance of the crop subsector was the Government's failure to provide adequate price incentives to producers. Most crops are cultivated by private farmers who sell most of their marketable surplus outside official channels. However, the Government controls the producer price of most agricultural crops, and, until recently, these prices were kept low for the benefit of urban consumers. Table 3 shows that, in real terms, the producer prices of most crops declined significantly over the last six years, thereby reducing both farmers- incomes and their incentives to plant, produce or invest for future production. A large increase in banana prices in 1981 was an exception. Table 3: INDICES OF REAL PRODUCER PRICES FOR SELECTED CROPS,1/ 1976-1981 (1975=100) 1976 1977 1978 1979 1980 19812/ Bananas 117.0 116.6 106.0 85.6 58.7 84.5 Maize 95.7 108.1 98.3 79.4 79.7 62.0 Sorghum (white) 95.7 108.4 98.3 79.4 79.7 55.1 Rice 87.7 79.3 72.1 58.2 36.5 - Cotton 105.2 103.1 86.4 75.7 54.8 44.3 Sesame 87.7 95.2 86.5 69.9 54.8 57.0 1/ In the absence of a price index of the bundle of commodities purchased by the rural population, official producer prices deflated by Mogadishu Consumer Price Index. 2/ From July 1981. Source: Statistical Annex, Table 7.6 2.10 The persistent decline in banana production through the 1970s is of particular concern because of the traditional role of this crop as a generator of foreign exchange. And because virtually all of this crop is marketed, it is here that the disincentive effects of the declining real producer price may be seen most clearly. The nominal producer price of bananas was raised only marginally during the period 1973-80. As may be seen from Table 3, the decline in real terms was particularly severe, with the consequence that between 1970 and 1981 the area under cultivation, yields per hectare, total output, and the volume and value of exports all dropped markedly.5/ There were two adjustments of the nominal producer price in 1981 which served to considerably improve profitability and incentives but the producer price in real terms was still below 1975. But 5/ See Statistical Annex, Table 7.2  - 12 - the impact of subsequent devaluation on the cost side, together with the effects of continuing domestic inflation, have already served to erode the adequacy of the present producer price.6/ 2.11 Underlying the inadequacy of producer prices through most of the 1970s was the overvaluation of the exchange rate. This resulted not only in an inadequacy of incentives for export crops (including mainly sesame in addition to bananas) but also led to an underpricing of food imports, which soared in the latter half of the 1970s. These imports comprised not only the relatively recent large shipment of aid-financed food imports for refugee relief, but also food imports consumed by Somalia's own population. To the extent that these food imports served to dampen local food prices, they constituted a disincentive to local production. The undervaluation of the exchange rate also resulted in an underpricing of imported inputs, thereby contributing to inefficient resource use on the input side. 2.12 Other factors which contributed to the decline of crop production were farmers inadequate financial resources and limited access to productive inputs; the inadequacy of extension services; and the lack of vital infrastructure. In the allocation of credit for example, the crop sector (as well as the livestock and fishery sectors) received a very low share of total bank credit relative to both the importance of these sectors in the economy and the shares of the state-owned trading and industrial enterprises. In 1975, the three agricultural subsectors together received only 14 percent of total bank credit whereas the industrial and trading sectors received 83 percent. In April 1977, the Central Bank laid down quantitative guidelines regarding allocation of credit to the agriculture sector with a view to rationalizing the system of medium-and shorter-term credit to the banana industry and increasing credit to livestock and agriculture. As a result, the share of bank credit received by agricu:Lture and livestock sectors rose to over 20 percent in 1978. However, following the emergence of the financial crisis, the share of credit received by these two sectors declined in 1979-80 to the previous levels. Fertilizers, improved seeds, tools, farm machinery and equipment and spare parts have also become in increasingly short supply as the balance of payments has come under increasing strain. 2.13 Extension services were until recently very rudimentary and are in any case still ineffective--mainly for institutional reasons and partly owing to the lack of appropriate technical packages and messages to deliver. Moreover, the Government has not properly maintained existing infrastructure for water, the country's most scarce resource. There is no management system for allocating water, while in several areas channels are choked with weed growth, resulting in excessive seepage through embankments and water-logging in nearby lands. At the same time, the absence of any water use charges has led to an inefficient use of such scarce water as is available. For example, the overuse of water by upstream farmers has left too little water available for those downstream. 6/ See Statistical Annex, Table 7.3.  - 13 - 2.14 There was a marked decline in fish production during 1975-78 as the total fish catch, including lobsters, dropped from over 10,000 tons to less than 4,000 tons. A decline in offshore fish production was caused by the dissolution of joint venture with the Soviet Union and the withdrawal (in 1977) of the Soviet fishing fleet. A decline in inshore (artisanal) catches after 1976 was due to a deterioration in the maintenance of boats and other facilities; out of 500 motor boats supplied in 1975 and 1976, for example, only about one-fourth were still operational in 1980. At the same time, there was a deterioration of fish processing facilities (most currently inoperative) which also suffered from inadequate planning, poor location, lack of management, and a shortage of fish supplies and machinery spares. Other constraints to fishery development include: the inadequacy of marketing and collection systems along the northern shore; and the scarcity of fishing equipment (including spare parts) resulting from the overall scarcity of foreign exchange (while at the same time the overvalued exchange rate was reflected in underpriced inputs); and the absence of a clear-cut Government strategy for the development of off-shore fishing. 2.15 In addition to the above-mentioned constraints and factors underlying the poor performance of Somali agriculture in the past, two other important factors, which bear upon the performance of all three subsectors, need to be emphasized, namely: (i) the inadequacy of public resources devoted to agriculture vis-a-vis other sectors; and (ii) insti- tutional problems which stemmed from the proliferation, poor performance, and lack of coordination among the many Government and parastatal agencies involved in the sector. 2.16 The share of total public sector investment intended to be directed to agriculture in the 1974-78 Development Plan was 37 percent. Actual development expenditure on the sector during the plan period was however only 24 percent, as compared with 35 percent on economic infrastructure and 27 percent on industry. Similarly under the Three Year Development Plan (1979-1981), while the targeted share of investment in agriculture rose to 34 percent, the proportion of actual development expenditure was 30 percent. Whereas the draft Five Year Development Plan (1982-1986), proposes that nearly half of the total targeted investment be directed to "agriculture", it should be noted that a major proportion (over 20 percent) is designated for the Bardhere Dam project--which is essentially an infrastructural rather than an agricultural project. 2.17 Agricultural development has also been hindered by a mixture of institutional inadequacies and interferences. There is a number of Government and parastatal organizations in the field of Agriculture which are all inadequately staffed and poorly-managed. These organizations have not been able to perform effectively such vital functions as research, extension, water management, sectoral planning and policy formulation (which depends in turn on the adequate collection, processing and analysis of farm budget, price and other data), and the identification, preparation and implementation of infrastructural and other projects designed to raise productive capacities, deliver appropriate technologies, and othenrise raise the productivity of the nation's individual farmers, livestock  - 14 - producers and fishermen. At the same time, there is a superstructure of overstaffed agencies, particularly in the areas of marketing and distribution whose operations are not only inefficient but which also serve to discourage private entrepreneurs and investment in crop marketing, input delivery, transport and storage. 2.18 Within the public agencies concerned with the livestock sector7/, for example, the few top level personnel are generally well trained and qualified; but middle- and lower-level officials and field staff frequently lack both training and experience. This is compounded by poor means of communication, irregular supplies and poor management. Veterinary services at the producer level are particularly poor, but this key constraint has not received the attention it deserves. The official services for export of live animals suffer from poor facilities for holding grounds and stocking yards, port congestion, inadequate shipping services and poor communications. However, both internal marketing and export trade are in the hands of private traders, who offer a reasonably efficient service to the producers, including a traditional credit arrangement. The agencies serving the crop sectorg/ are similarly handicapped by limited operating funds and facilities, a shortage of trained and experienced manpower, frequent staff transfers, absence of work programs and the lack of effective management control. The Research Institute, which is responsible in principle for the generation of location specific technical packages for extension to farmers throughout the country, has in practice been much more oriented towards the irrigated than the rainfed areas on which the bulk of the farming population is dependent. The most critical factor in these areas is moisture, yet progress has been painfully slow towards developing a viable technical package for smallholders in dry areas. Research into the integration of crop and livestock activities has been weak in the past, although this is expected to be addressed on a pilot basis under an IDA project. Services at the producer level are also poor, although a program for strengthening the Extension Service, training state farm managers, and developing a national agricultural research strategy has recently been organized under Agricultural Extension and Farm Management Training Project. The traditional marketing system for crops is not as well developed as that for livestock. Roads and other marketing infrastructure are generally poor and post-harvest technology, particularly storage, is 7/ These comprise the Ministry of Livestock, Forestry and Range (MLFR) and its departments (Animal Health, Animal Production, Planning, Training and Research, and Administration) the Tsetse Unit, and one parastatal - the National Range Agency (NRA). 8/ The crop production subsector is served by the Ministry of Agriculture (MOA) through its departments of Production and Extension, Land and Water Resources, Plant Protection and Locust Control, Planning and Statistics, Administration and its Research Institute. The Ministry is represented regionally by the Regional Coordinators. MOA also operates farmers training centers and the Agricultural Secondary School at Afgoi.  - 15 - wasteful. Credit for agricultural producers is provided mainly by the Somali Development Bank for long term loans and by the Commercial and Savings Bank for short- and medium-term loans. But the bulk of these loans has gone to the larger banana farmers and to livestock traders, to the neglect of the smallholders. Unlike in many other East African countries, there is no nationwide smallholder credit program. Manufacturing and Processing 2.19 The Record. Somalia's manufacturing sector is still relatively small, accounting for only some eight percent of GDP, and is dominated by some 15 state-owned enterprises employing nearly 10,000 workers. Agro-processing industries, mainly for import-substitution, account for about half of total value added and employment in the sector. 2.20 Among the more important import-substitution industries are SOMALTEX (textiles), SNAI (sugar), Juba Sugar, a petroleum refinery, and a urea plant under construction; other import substituting industries (including some smaller scale enterprises in the private sector) include grain processing and the manufacture of edible oil, cigarettes and matches, packaging materials, leather and footwear, pharmaceutical products and electrical fittings. The principal export industries are meat and fish processing. The 1970s witnessed substantial growth in the number of enterprises, investment and employment in manufacturing. But the national accounts show an absolute decline (averaging about one percent per year) in manufacturing value added between 1972 and 1978. Partial evidence comprising production and capacity utilization data suggests that this decline may well have accelerated since 1978. In any event, it is clear that in terms of virtually all performance criteria (other than employment creation), the performance of public-sector manufacturing/processing industry as a whole has been very poor. A large proportion of the enterprises are producing at far below capacity (25 percent or less in some cases), the sectoral capital output ratio is very high, and most enterprises are consistently incurring financial losses. Table 4 below shows recent trends in physical output for a number of principal commodities.  - 16 - Table 4: INDUSTRIAL OUTPUT OF SELECTED PRODUCTS, 1977-1981 Average Annual Growth Rate 1977 1978 1979 1980 1981 1977-1981 Sugar (thous. tons) 33.0 24.0 21.1 29.1 26.8 -5 Textiles (mln. yards) 12.9 13.8 9.9 13.1 10.1 -6 Canned meat (mln. tins) 6.6 -- 1.5 0.8 -- -50* Milk (mln. liters) 3.8 3.3 2.7 1.2 1.4 -22 Pasta and flour (thous. tons) 8.4 8.1 5.8 7.5 5.9 -9 Canned fruit & vegetables 1.2 0.9 1.0 0.4 0.7 -13 (thous. tons) Boxes and bags (thous. tons) 5.0 4.8 5.2 3.2 3.3 -10 *For Period 1977-80. Source: Central Bank of Somalia, Annual Report, 1981. 2.21 There is some evidence which suggests that the relatively-much- smaller private manufacturing sector9/ has performed much better than public sector enterprises. Between the early and late 1970s, real value added in private industryl/ approximately doubled, implying an average annual growth rate of 10 percent annually; value added per employee rose at nearly the same rate during this same period, while public sector employment in industrial enterprises more than doubled (reflecting in part the Government's social objective to guarantee jobs to school leavers). In real terms the value added per employee in public manufacturing enterprises declined at an average rate of 11 percent per annum (see Table 5). 9/ In the late 1970s the share of the private sector in total industrial value added (for establishments employing five or more persons) was less than 20 percent. 10/ As reported in terms of 1970 constant prices.  - 17 - Table 5: VALUE ADDED IN INDUSTRIAL ESTABLISHMENTS EMPLOYING FIVE OR MORE PERSONS (constant 1970 prices) Value Added Value Added per Employee Public Private Total Public Private Total (millions of So.Sh.) (thousands of So. sh.) Average 1970-72 104 13 118 30 5 19 Average 1977-79 126 26 152 13 9 12 Average annual growth rate, 1970-72 to 1977-79 3 10 4 -11 9 -7 Source: Ministry of National Planning, Industrial Production Survey, various issues. 2.22 The Main Constraints. In view of the large share of agro-processing in the sector, a diagnosis of the causes of poor performance in industry may well begin with an assessment of the linkages between agricultural and industrial output. And this assessment immediately leads to the conclusion that a large part of the explanation of low capacity utilization in industry lies in the poor performance of agriculture, as the stagnation of agricultural output led to scarcities of local raw materials, including fish and meat for the export-oriented enterprises and grain, sugar cane, fruits and vegetables, sesame, groundnuts, cotton, and milk for the import-substitution processing enterprises. The experience of the Kismayo meat factory, Mogadishu milk plant, and other agro-processing enterprises has also demonstrated that Government's attempts to impose lower-than-market prices, in order to provide cheap inputs to the factories, are uniformly unsuccessful. 2.23 Numerous instances can be cited. Prices of raw milk set much below the market price reduced supplies to the milk plant, resulting in a decline of pasteurized milk production from over 3 million liters in 1976-78 to less than 1 million liters in 1980 and 1981. Supplies of oil seeds (sesame) to the oil mill are insufficient owing to the low producer prices, and as a result edible oil production declined sharply. For similar reasons the fruit and vegetables canning plant (ITOP) suffers from an insufficient supply of raw materials. The textile mill (Somaltex) suffers from a shortage of cotton due to the low producer price, and the meat factories (at Kismayo and Mogadishu) suffered from a serious shortage of animals (and were finally closed down) partly due to the low prices paid for cattle.  - 18 - 2.24. Also on the supply side, the output, productivity and profitability of Somalia's manufacturing enterprises (mainly in the public sector but also in the private sector) have been constrained by scarcities of other essential inputs including spare parts, other imported components, working capital, complementary infrastructure, and qualified managerial and technical personnel. The inadequacy of imported inputs is attributable to the country's overall scarcity of foreign exchange (in turn largely owing to an overvalued exchange rate) and the lack of a foreign exchange budgeting process to allocate this scarce resource to highest priority uses. Although in the 1970s some portion of low capacity utilization vras attributable to power scarcity and outages (e.g. SOMALTEX and flour milling), the completion of the Jesira Power Station in 1979 has served to diminish considerably this particular constraint. 2.25 The scarcity of working capital is attributable mainly to government policies which have, inter alia: held down output prices, thereby diminishing the potential profits (or increasing the losses) of state-owned enterprises; imposed high turnover as well as profits taxes on the enterprises; transferred to the Treasury a substantial proportion of depreciation allowances; rationed bank credit mainly to the Government itself and to state trading and marketing agencies; and, as noted above, required enterprises to inflate their wage bills by hiring unneeded workers. All of these policies have served to prevent enterprises from pursuing sound financial management practices and, in turn, have contributed to the decapitalization, financial losses, and low capacity utilization rates of public industries. 2.26 Management problems per se include deficiencies in management systems, fragmented managerial responsibility, and an overall scarcity of managerial talent and experience. Among the deficiencies in management systems are poor accounting practices, deficient inventory control and procurement practices, and the absence of clear and consistent operating guidelines. The fragmentation of managerial responsibility and bureaucratic approval processes has served to diminish the productivit) of managers and bureaucrats alike. The inadequate stock of managerial talent per se is of course a more 'structural' constraint reflecting the recency of Somalia's industrialization effort and the lack of formal and informal training programs. But this also reflects the 'spreading thinly' of such domestic talent as is available, and the Government's reluctance, at least until recently, to make more use of foreign managers, whether through direct-hire or management contracts. 2.27 To a large extent, the poor performance of Somali industry over the past decade is attributable to these essentially 'supply side' constraints. And insofar as some of them arise from shortcomings in policy (as distinguished from external factors such as deteriorating terms of trade or declining aid flows), it follows that the future performance of the sector can be improved substantially by addressing these policy issues. A number of recommendations in this context are set forth in Part II of this report. But it should also be noted that in those cases where the underutilization of capacity (or otherwise the poor performance of  - 19 - industry) is attributable more to 'demand side' constraints (or supply constraints beyond the effective control of domestic policy) il/, such constraints may prove less tractable and amenable to policy action. This is also the case for those projects which were ill-conceived in the project planning, selection and design stages. Thus, for those projects whose export markets have fallen away (e.g. the Kismayo meat factory, which was created to produce for the Soviet market) or whose initial costs were excessively high or whose scale is much too large for the domestic market they are geared to serve, the issue is not so much how to make them viable but rather how to minimize the burden that their operation puts on the economy. A case in point is the situation of the packing materials industry, which has been operating at low capacity owing to low banana production. Here, however, the economic issue is one of forward rather than backward linkage in that this industry is passing on its very high costs to banana exporters, for whom the importation of packing supplies is not an alternative. The result has been, given that Somalia is a "price taker" in international banana markets, that Somali banana exports are less competitive. 2.28 A much fuller diagnosis of the problems and constraints confronting Somalia's public enterprises (of which those in the manufacturing sector comprise only one subset) is presented in Annex I of World Bank Report No. 3284-SO, Memorandum on the Economy of Somalia (March 1981) and in World Bank Report No. 1437-SO, Parastatal Enterprises in Somalia (in two volumes), December, 1976. 11/ An example in this category is the low capacity utilization experienced by the oil refinery, owing to the interruption of crude oil supplies from Iraq, which for contractual and technical reasons could not be substituted by other suppliers for about one year. f  - 20 - CHAPTER 3: CAUSES OF THE RECENT CRISIS 3.01 The nature and proximate causes of the recent financial crisis were outlined in Chapter 1. To recapitulate very briefly, up until 19i77 Somalia's budgetary and balance of payments positions were more or less in balance -- albeit a balance characterized by low levels of savings and investment and by stagnation in the commodity producing sectors. Central Bank financing of the overall budgetary deficit was negligible or negative, inflation was moderate (9 percent in 1977), international reserves were at a comfortable level and rising, and there were no arrears in debt payments. 3.02 The event which precipitated the crisis was the 1977-1978 conflict with Ethiopia, which led to a large influx of refugees. This influx started in early 1978 and by end 1980 there were over one million refugees in camps, with almost 90 percent of them being women and children. Overall coordination for the massive relief effort was provided by the United Nations High Commission for Refugees (UNHCR), working closely with Somalia's National Refugees Commission and several voluntary organizations. During 1978-81, the international community provided over $200 million worth of assistance for the refugees. By September 1981, the crisis had been brought under control; the influx of refugees started to drop off to only a handful each month, and refugee health and nutrition improved as food supplies stabilized. Following a recent census by UNHCR, it was estimated that there were around 700,000 refugees in camps. The UNHCR is now trying to provide assistance in finding suitable economic occupations for the refugees and is also designing medium-term projects which emphasize their active participation in the country's overall development program. 3.03 The conflict with Ethiopia also led to loss of a major grazing area, and the severance of relations with the Soviet Union, Somalia's (then) main source of financial and technical assistance. Reflecting these developments, there was a great surge in 1978-81 in both Government expenditures and imports relative to revenues and exports. This resulted in a considerable widening of the budgetary and trade deficits. The former was followed by increased recourse by the Government to the Central Bank, a large expansion of credit, a rapid rise in the money supply, and sharply accelerated inflation, which reached 59 percent in 1980. On the external side, the problem of financing the widened trade deficit was compounded by a decline in foreign grants, with the consequence that international reserves declined sharply and debt arrears mounted. 3.04 This, in sum, is the story of an explosion of demand in the face of a long-standing stagnation in supply. The purpose of this chapter is to disaggregate the so-far summary analysis of the causes of the crisis, and thereby to arrive at a somewhat fuller diagnosis of the financial imbalances which continue to pose major problems for Somalia's policy- makers. Since the IMF has during the past three years analyzed in considerable detail all of the elements which are the focus of this chapter (namely, public finance, trends in credit, money and prices, and the external sector), the following exposition will itself be quite brief.  - 21 - The Public Finances 3.05 Owing to the incomplete coverage and arcane accounting which characterize Somalia's public sector accounts, it has not so far been possible to obtain an accurate or comprehensive picture of the country's fiscal situation. The budgetary accounts cover only a part of Central Government transactions, and little information is available on the precise size and distribution of the large expenditures which are recorded only as extra-budgetary or 'other'. Similarly, the development budget includes only the domestic component of development expenditures, and the data do not distinguish with any certainty between recurrent and capital expenditures. These last deficiencies are particularly inhibiting to what is ordinarily a central focus of World Bank economic reports: namely, an analysis of public sector investment -- its size, the appropriateness of its distribution, the efficiency of resource use, the generation of counterpart funds through commodity aid, domestic vis-a-vis foreign financing of development expenditure, and other related issues. It is hoped that immediate action will be taken to improve the data base without which the Government itself (not to mention outside institutions) cannot acquire an intelligent appreciation of Somalia's public finances.I! 3.06 Notwithstanding these caveats, the data in Table 6 provide some basis for assessing the main elements of the central government's operations over the past several years. It may readily be seen from this table, for example, that during the years 1978-1980 the growth of expenditures (and particularly defense-related expenditures) far outstripped the growth of revenues, resulting in the rapid widening of deficits in both the current account (representing government dissavings) and the overall balance. Whereas in 1977 foreign finances had exceeded the overall deficit in 1978 the combination of an enlarged overall deficit and a reduced inflow of foreign grants resulted in a very large (over So.Sh. 400 million) volume of central bank financing. The budgetary deterioration was even more marked in 1979, when in spite of a substantial (42 percent in nominal terms) increase in foreign financing, the Government's recourse to Central Bank financing rose to So.Sh. 920 million -- the equivalent of over 10 percent of GDP. The recorded current expenditures on defense in the years 1978-79 were on the order of 8-9 percent of GDP, and the total outlay for defense was probably substantially higher. 3.07 At the beginning of 1980, the Somali authorities adopted a stabilization program supported by a one-year stand-by arrangement from the IMF. During 1980 the Government succeeded in reducing somewhat (by 7 percent) both its total expenditures and the overall budgetary deficit -- this in spite of a reduction in revenues in that year -- leading to a deceleration in net domestic credit expansion and in domestic liquidity. 1/ Some improvement in Government budgetary accounts has recently been made with the assistance of an IMF advisor to the Ministry of Finance.  - 22 - Table 6: CENTRAL GOVERNMENT OPERATIONS, 1977-1982 (in millions of So.Sh.) 1977 1978 1979 1980 1981 1982 (Pr. Estimates) 1. Total Revenuesl/ 843 1420 1526 1421 2347 4369 of which Tax Revenues (647) (1154) (1315) (1193) 2. Current Expenditures 770 1362 1573 1618 2795 4463 of which Defense 2/ (269) ( 640) ( 663) ( 730) 3. Current Balance (1-2) 73 58 -47 -197 -448 -94 4. Development Expenditure3/ 211 187 224 200 286 357 5. Other Expenditure4/ 609 823 1447 1240 6. Overall Balance (3-4-5) -747 -952 -1718 1637 -1073 -1775 Financed by: Foreign 953 562 798 1010 726 1910 Loans, net 377 502 527 547 605 1105 Grants 576 60 271 463 121 805 Domestic 206 390 920 627 347 -135 Banking System -222 409 920 671 347 -135 Other 16 -19 - -44 - - Memorandum Items Total Expenditures (2+4+5) 1590 2372 3244 3072 3516 5100 Growth rates of: Total Revenues 26 68 7 -7 72 36 Current Expenditure 19 77 15 6 67 60 Development Expenditure 28 -11 20 -11 43 25 Total Expenditure -1 49 37 -5 14 45 Consumer Price Index 10 10 24 59 44 Note: See paragraph 3.03 regarding the deficiencies in the above data. 1/ Excluding grants, which are reported 'below the line' as a financing item. 2/ Including items reported as security -interior and police' and national militia but not including any defense-related expenditures incorporated under 'other expenditure' (line 5). 3/ Excluding foreign exchange component. 4/ Residual item, including foreign-financed capital expenditure, other extrabudgetary expenditure, and net lending to public enterprises. Source: Statistical Annex, Tables 5.1 and 5.2.  - 23 - Nevertheless, the stabilization program's credit and external debt ceilings were exceeded (resulting in Somalia being able to make only the first drawing under the Stand-by), and the rate of inflation in 1980 rose to 59 percent. 3.08 In mid-1981 the Government entered into a new stabilization program and one-year Stand-by arrangement with the IMF. This time the Government did abide by the ceilings established under this program. A key element of the program was a substantial devaluation of the Somali shilling -- which devaluation had a large effect on the public finances. The content and consequences of the 1981 and subsequent 1982 stabilization programs will be described in Chapter 4, but it may be noted here that whereas the level of both tax and total revenue receipts had changed very little in the years 1978-80 (and hence had declined substantially in real terms in the face of accelerating inflation), there was a large (72 percent in nominal terms) increase in total revenues in 1981. This increase was attributable largely to the effects of the devaluation and to the enlarged import duty receipts which stemmed from a surge in franco valuta imports prior to the termination of such imports. Current expenditures also rose by over 70 percent in 1981, partly as consequences of the devaluation and a 7-30 percent increase in Government salaries. Owing mainly to a very sharp cutback in development and 'other' expenditures, however, the rise in total expenditure (in nominal terms) for 1981 was held to 14 percent, and the overall budgetary deficit was reduced by 35 percent. Hence, in spite of a large drop in foreign grants and in total foreign financing, the volume of Central Bank financing was reduced to So.Sh. 343 million. 3.09 The Government's current stabilization program, adopted in mid-1982 and supported by an 18-month IMF Stand-by, has targeted a 36 percent increase in total revenues in 1982 and a 45 percent increase in total expenditures. Both would represent substantial increases in real terms if the inflation rate were to be reduced to 17 percent (as compared to 44 percent in 1981), as targeted.2/ These nominal revenue and expenditure increases must also be seen in the context of Somalia's further devaluation (in mid-1982) of the shilling by 32 percent on the import side and by 15 percent on the export side, bearing in mind also the dependence of Somalia's revenues on international trade. Between 1977 and 1980, for example, import duties provided an average of 40 percent of total revenue, taxes on goods and services 23 percent, and taxes on the public enterprises 16 percent. Given this structure of taxation, and in view of Somalia's poverty and narrow production base, the economy up until 1978 was relatively highly taxed.3J Since then, the ratio of Government revenue to GDP appears to have declined slightly from about 18 percent in 1978 to around 15 percent in 1981. However, it seems clear that -fiscal reform' must concentrate more on expenditure control rather than on pressing too much harder on the revenue side, especially insofar as this might prove to be at the expense of continuing deterioration in incentives and public enterprise financial viability. This is not to say, however, that there is 2/ The inflation rate in the first quarter of 1982 was however at about the 1981 rate. 3/ See for example, the cross-section analysis of V. Tanzi in Part II of Taxation in Sub-Saharan Africa, IMF, 1981.  - 24 - not considerable scope for rationalizing the tax structure and improving tax administration, e.g., along the lines recommended by a 1980 IMF tax survey mission. Although until now little action has been taken by the Government to implement the recommendations of the IMF report, it recently expressed its intent to work towards a simplification of the import tax structure, a rationalization of the income tax structure, and the development of a sales tax. 3.10 On the expenditure side, the central issues would appear to relate to: the prospects for reducing the burden of defense expenditure, which is of course essentially a political matter; the possibilities for reducing redundant employment in the public sector, particularly with respect to abandoning the policy of guaranteeing employment to school leavers; the need to maintain incentives to qualified and needed public sector employees whose real wages have fallen drastically in the last decade (notwithstanding some recent increases in nominal wages); the prospects for containing the burden of subsidies to the public enterpr:Lses; and the need to maintain adequate allocations for development expenditure, lest the benefits of short-term stabilization prove to be obtained too much at the cost of foregone opportunities for longer-term growth and development. 3.11 With respect to this last issue, it may be observed from Table 6 that the budgetary allocations for development expenditure have declined drastically in real terms4/ since 1977. The table does not reveal explicitly -- but it is a fact that -- local currency allocations for development expenditure fell even further in nominal terms in 1981, and that such expenditures, while projected to rise somewhat in real terms in 1982, will remain substantially lower (again in real terms) than in 1979 and 1980. No increase is projected for 1983. Such austerity in the allocation of resources to development will undoubtedly slow the progress of certain foreign-aided projects and constrain the rate of disbursement of foreign exchange already committed to such projects. This is clearly a matter of considerable concern. Money, Credit, and Prices 3.12 Monetary and credit developments over the last few years directly reflect the deterioration in the Government's budgetary position, and to a lesser extent, in the balance of payments. As shown in Table 7, the net foreign asset position of the banking system, which remained satisfactory until 1978, has deteriorated continuously since 1979. Between 1978 and 1981, net domestic credit rose by about 165 percent, or at an annual average rate of about 39 percent (in current prices). The expansion was concentrated in Government borrowing from the Central Bank. At end of 1981, net claims on Government accounted for about 50 percent of total net domestic credit, compared to about 18 percent in 1978. The public entities also accounted for a large share of domestic credit, although their share in total net credit fell from 58 percent in 1978 to 39 percent in 1981. 4/ While the data in Table 6 are shown in nominal terms, a deflation of these values by the Mogadishu Consumer Price Index (also shown in the table) will provide an indication of the changes in real terms.  - 25 - Domestic credit going to the private sector has long remained a small proportion of the total, but its share fell from 23 percent in 1978 to about 13 percent in 1981. Table 7: MONETARY SURVEY, 1978-1981 (So.Sh. million, end of year) Percent Change Item 1977 1978 1979 1980 1981 1977-1981 Foreign Assets 802 936 316 145 126 -84 Domestic Credit 1182 1715 2957 3879 4545 285 Claims on Government (net) (-98) (311) (1231) (1902) (2250) 7231/ Claims on Public Entities (906) (1002) (1279) (1551) (1721) 90 Claims on Private Sector (375) (402) (447) (426) (574) 53 Money 1325 1728 2335 2783 3674 277 Quasi-Money 220 319 478 598 747 340 Memo Item Consumer Price Index 100 110 136 217 313 213 1/ For period 1978-81. Source: Statistical Annex, Table 6.1 3.13 Table 7 shows clearly that the tripling of the money supply which occured between 1977 and 1981 was attributable to the Government's expansionary fiscal policy. And the order of magnitude of the growth in domestic liquidity was such that it is also clear that the cause of Somalia's accelerating inflation was excessive demand. In the absence of labor unions, and with wages held down by both unemployment and Government wage policies, there were few 'cost push' pressures on prices, while the unchanged and undervalued exchange rate kept the price of imports well below their true scarcity value. Moreover, in view of the Government's control of various prices, changes in the consumer price index undoubtedly understate the magnitude of inflationary pressures in the economy. To some extent, of course, the rise in import prices in this period was also a contributing factor, since (recorded) imports comprised a large (and rising) share of GDP (nearly 40 percent in 1980). Yet some indication of the underpricing of imports via the exchange rate policy is provided by the fact that by 1980 the free market rate for the shilling was about two times the official rate. Thus, the evidence seems clear that Somalia's inflation was mainly attributable to demand expansionary policies of the Government.  - 26 - And it follows from this diagnosis that insofar as the domestic financial crisis was mainly a consequence of Government policies, so can changes in those policies bring about, over time, a restoration of financial equilibrium. The External Sector 3.14 Official data on Somalia's foreign trade and balance of paymtents are incomplete and inaccurate in many respects and provide only a very deficient basis for serious analysis or projections. The side-by-side existence (until recently) of an official exchange market and a free market (franco valuta) gave rise to large unrecorded trade and monetary flows. Export figures of supplier countries suggest that Somalia's imports are underrecorded by about 40 percent; so probably are exports. Similarly, official capital inflows are only partly recorded. The following limilted analysis is based on (incomplete) data from the Central Bank of Somalia and the IMF. 3.15 Among the salient characteristics of Somalia's balance of payments are the following: (i) a very narrow export base in which livestock and banana exports have for many years accounted for over 80 percent of total export earnings; (ii) a high share of external trade in GDP, with (recorded) exports in 1978 equivalent to about 10 percent and (recorded) imports at around 24 percent of GDP; (iii) as suggested by these ratios, a longstanding structural imbalance in external trade insofar as even before the recent crisis, export earnings were for some years averaging only about half of imports; (iv) a peculiar trade and exchange system characterized until recently by the Somali shilling's linkage to the dollar and a parallel exchange rate applied to foreign exchange earned by workers abroad as well as by livestock exporters (the latter facilitated by allowing under-invoicing of livestock exports); (v) the recent importance of worker remittances, which in the period 1977-80 were equivalent to over 40 percent of (recorded) exports; (vi) through most of the 1970s, a high volume of concessionary foreign aid, relative to the country's GDP, and (vii) a high degree of variability in the size, sources, and composition of these aid flows. 3.16 Recent trends and variations in a number of the principal variables are shown in Table 8. It may be seen that the years 1977-81 were characterized by slow growth in export earnings (and an absolute decline in the value of banana exports); a surge in imports in the years 1979-80, especially in food imports and imports under the franco valuta system; (probably) some improvement in the terms of trade in the latter half of the 1970s;5/ marked variations in private transfer receipts (emigrant worker remittances); current account deficits in the years 1979-81 averaging some $240 million, as compared to an average of $110 million in the years 5/ Somali data do not permit a firm conclusion to be made about trends in the terms of trade, but it does appear that the unit price increases reached for livestock and bananas were greater than the weighted average increase in import prices over this period.  - 27 - Table 8 : SUMMARY 01 BALANCE OF PAYMENTS, 1977-1981 (millions of US$) 1977 1978 1979 1980 1981 Exports, f.o.b. 71.3 109.5 106.0 133.3 111.9 of which: livestock (47.1) (90.6) (75.4) 101.6 (97.7) bananas (8.4) (9.4) (11.6) (8.1) (6.0) Imports, c.i.f. 206.0 275.2 -394.1 -461.5 -323.3 of which: franco valuta (10.8) (75.8) (34.5) (54.9) (60.7) Trade Balance -134.7 -165.7 -288.1 -328.2 -211.4 Non-factor services (net) -8.6 -8.3 -14.2 -7.0 -3.7 Factor income (net) 2.1 3.5 2.5 -0.9 -4.5 Private transfers (net) 13.1 78.1 35.9 57.3 32.2 Current Balance -128.1 -92.4 -263.9 -278.8 -187.4 Direct Investment 7.8 0.3 - - - Official Grants 105.9 27.8 58.1 142.6 64.4 Public M&LT Loans (net) 88.1 122.1 110.0 138.0 189.5 Other M&LT (net) -24.1 -43.3 -26.3 -51.0 -138.7 Short-teru cap. (net) 7.8 - 3.9 4.2 34.1 Errors & omissions -11.5 6.9 19.6 21.6 16.6 Change in net reserves -- (increase) -45.9 -21.4 98.6 23.4 21.5 Memorandum Items Gross reserves, end year 120.0 126.3 43.8 14.6 30.7 (as months' imports equiv.) (7.4) (7.6) (1.5) (0.4) (1.4) M1T debt outstanding 388 526 598 725 907 Debt service ratio (%)I/ 3 3 2 8 5 Arrears in debt service 8 8 8 28 63 (March 82) (Indices: 1974 - 100) Livestock exports volume 82 123 102 151 118 unit price 130 203 220 185 -- Banana exports volume 55 59 57 52 34 unit price 198 135 150 166 236 Note: See paragraph 3.12 regarding deficiencies in the above data. _/ Actual payments. HIad Somalia fully serviced its debt, the ratio in 1980 and 1981 would have been 201 and 40%, respectively. Source: Statistical Annex, Tables 3.2, 3.9, 3.11, 4.4.  - 28 - 1977-78; extra-ordinarily high grant inflows in 1977 and 1980; a gradual rise in medium-and-long-term loan disbursements until 1981, when these disbursements fell by about 50 percent in real terms; a precipitious decline in international reserves in 1979, and a further decline in 1980 roughly offset by an increase in 1981; a steep rise in both outstanding debt and the debt service ratio; and rising debt arrears. 3.17 The diagnosis of how and why these structural characteristics and recent developments in the balance of payments came to be and came about, respectively, has already been provided in large part by the preceding sections. In broad terms, for example, the low level and slow growth in exports are explained mainly by the stagnation of agricultural production, which has in turn been attributed (in part) to the overvalued exchange rate and inadequate incentives to crop (especially banana) producers. It should also be noted that, whereas the data for recent years show some growth in livestock exports, the volume of these exports had not yet by 1981 recovered to the levels attained before the 1974/75 drought -- even though livestock production and the estimated size of the herds had recovered to pre-drought levels. Indeed, the export record for recent years would have appeared far more dismal had not both livestock and banana world export prices risen as substantially as they did in the second half of the 1970s. 3.18 The increase in recorded imports which occurred in the late 1970s had several distinct components. In sum, there was very little increase (in real terms) in the importation of intermediate goods (which fact was reflected in the growing scarcity of imported inputs needed for domestic commodity production) whereas there were very large increases, in both nominal and real terms, in imports of both consumer and capital goods. In 1974, for example, imports of consumer, intermediate and capital goods had comprised 39, 39, and 22 percent of total imports, respectively. In 1979, these proportions were 42, 25, and 33 percent, respectively. Much of the absolute increase in food imports comprised aid-financed drought and refugee relief, but a considerable part corresponded to that required to close the widening gap between population growth and crop output,6/ plus some increase in consumption of relatively luxury foods imported through the franco-valuta system. Moreover, the importation of non-food consumption goods grew rapidly in the late 1970s (by 20 percent in nominal terms between 1974 and 1979), also through the franco valuta system. 3.19 The value of capital goods imports, which had averaged some $50 million annually in the years 1974-76, rose to an average of some $90 million (in current dollars) in the years 1977-80; this trend was of course directly reflected in the capital side by the increased level of disbursement on project loans. In 1981, however, as noted earlier, these imports and disbursements fell by over 40 percent (some 50 percent in real terms) as a consequence of the Government's fiscal austerity. Similarly, the counterpart of franco valuta imports was the inflow of worker remittances. The sharp decline in remittances in 1981 is at least partly explained by the abolition of the franco valuta system in that year. 6/ It is worth noting here that some substitution of grain for meat consumption has been observed among the rural population.  - 29 - External Debt 3.20 Somalia's external debt burden has grown rapidly in recent years. The total external public debt, outstanding and disbursed (DOD), which stood at less than $300 million at the beginning of 1977, doubled to $600 million by the beginning of 1980.7/ At end 1981, DOD exceeded $900 million, representing almost eight times the value of recorded exports in that year and equivalent to about 55 percent of GDP. New commitments increased rapidly, from $88 million in 1976 to $263 million in 1977. Thereafter, in 1978 and 1979, new commitments declined to an average of about $100 million, rising again to $202 and $247 million in 1980 and 1981, respectively. A breakdown of debt outstanding by creditor country group reveals that 33 percent of total external public debt is owed to OPEC countries and 23 percent to centrally-planned countries. The manufacturing and infrastructure sectors account for 41 percent of the total DOD, while loans for commodity assistance and balance of payments support represent 18 percent. Agriculture, fishing and social services account for only a small proportion (14 percent) of total outstanding debt. 3.21 In the past, Somalia was able to mobilize external loans on highly concessional terms. Since 1978, however, the structure and terms of borrowing have hardened (Table 9) as Somalia started to raise loans on non-concessional terms; these included a large export credit for a urea project and short-term balance of payments' support from Arab and international organizations (including the Arab Monetary Fund and IMF). Table 9: DISBURSEMENTS OF EXTERNAL LOANS AND STRUCTURE AND TERMS OF BORROWING, 1978-1981 Disburse- Grace Grant ments Interest Rate Maturity Period Element Year (US$ Mill) (%) (Years) (Years) (%) 1978 127 0.6 38.1 9.7 79.3 1979 114 0.6 34.6 7.2 66.7 1980 147 1.4 27.6 6.5 57.9 1981 206 5.7 14.9 4.1 25.0 Source: Statistical Annex, Tables 4.2 and 4.3 7/ This increase occurred in spite of cancellations of debt in 1977-78 amounting to $202 million.  - 30 - This trend was reflected in increased debt service payments, which rose from less than $4 million in 1977 to over $16 million in 1981. Hence., the debt service ratio, which until recently was moderately low (below 7 percent up to 1979) jumped to 20 percent (including arrears) in 1980. Somalia's arrears at end-March 1982 amounted to about $63 million, comprising $44 million in principal and $19 million in interest payments. 3.22 An analysis of the structure of Somalia's debt and its debt servicing obligation points to the conclusion that the future debt servicing burden will be very heavy, notwithstanding the Government's having undertaken, in its current stabilization program, to minimize further contractions of non-concessional debt. Issues relating to the Government's debt management, as well as to various other aspects of economic management, are discussed in Chapter 5; implications of the debt burden are considered in Chapter 6.  - 31 - PART II: POLICY AGENDA AND PROSPECTS Thus far, this report has concentrated on presenting a description and diagnosis of some structural constraints and policy problems besetting the economy. This part of the report provides, firstly, a brief description and review (in Chapter 4) of the principal policy measures already introduced by the Government to deal mainly with its financial crisis. It then sets forth (in Chapter 5) a number of recommendations for additional policy measures in those areas where the diagnosis of Part I points most clearly to the need for further action in the near-to-medium term. These actions fall into three broad categories, namely: (i) demand management measures aimed primarily at reducing the internal and external financial imbalances and at bringing down the inflation rate; (ii) measures to improve the utilization of existing capacities and to stimulate growth in livestock, crop, fishery and manufacturing output, including through the mobilization of private sector resources and encouragement of private sector initiatives; and (iii) measures to improve capacities and instruments for economic management. The final chapter (Chapter 6) then considers briefly Somalia-s medium-term prospects, with particular reference to the country's balance of payments outlook on the assumption that the policy framework recommended in Chapter 5 is implemented.  - 32 - CHAPTER 4: RECENT POLICY CHANGES 4.01 As the financial crisis evolved through 1978 and 1979, the Government gradually became convinced of the need to take remedial action. As was noted in the previous chapter, at the beginning of 1980 it did embark upon a limited stabilization program (supported by an IMF Standby) which served to reduce slightly both total government expenditures and the budgetary deficit. But no action was taken that year on the exchange rate, the program's credit and debt ceilings were exceeded, inflation accelerated, international reserves declined, debt arrears rose, and the crisis worsened. 4.02 Beginning in early 1981, however, the Government did begin to take more substantial remedial action, and through the course of 1981 and 1982 it proceeded to implement two successive stabilization programs (both supported by IMF Stand-by arrangements). The core of these programs comprised measures to adjust the exchange rate, impose fiscal and monetary restraint, and to raise producer prices. In April 1981, producer prices for agricultural crops (including bananas) were raised; these increases ranged from 14 percent for upgraded cotton to 66 percent for oilseeds. The Government also decided to review the operations of the public enterprises, i.e., to determine their economic and financial viability. Three public agencies/enterprises were abolished. On June 30, 1981, as noted earlier, the Government entered into a one-year Stand-by program with the IMF. As part of the stabilization program adopted at that time, a dual exchange rate system was introduced which meant a devaluation of the Somali shilling.l/ In the first market, the old exchange rate (of So.Sh. 6.3 = $ 1.00) was maintained; transactions in this market covered the import of essential commodities.2/ In the second market, where all other foreign transactions were conducted, a new exchange rate (of So.Sh. 12.6 = $ 1.00) was established. At the same time, the producer price for bananas was doubled and banana growers were given the full benefit of the devaluation. The Government sought to improve its budgetary position by introducing a new levy (of 25 percent ad valorem) on livestock exports (to avoid windfall profits accruing to livestock traders from the exchange rate adjustment) and by restraining Government expenditures. It is not however clear what was the net effect of the June 1981 devaluation on livestock export profitability or on incentives to worker remittances, given the other changes taking place at the time of (or soon after) that devaluation. The program stipulated a substantial reduction in Government recourse to the 1/ Between 1974 and mid-1979, Somalia's imported-weighted effective exchange rate (in real terms) had remained fairly constant. From mid-1979 to mid-1981, the index more than doubled (from about 70 to 150; July 1981 = 100); the July 1981 adjustment brought the index down to 100. 2/ These included: foodstuffs, medicines and chemicals, manufacturing raw materials, spare parts, and agricultural input.  - 33 - banking system, and as was shown in Table 6, this was achieved. Finally, an upward adjustment of the interest rate structure was introduced3/ and the Government decided to do away with the franco valuta system; after an interim period of five months, the system was terminated in November 1981. In the event, the Government received SDR43 million from the IMF in balance of payments support covering all the drawings under the arrangement. 4.03 Following the completion of the 1981/82 program, the Government adopted a new stabilization program in mid-1982, supported by the Fund with a SDR 60 million 18-month Stand-by arrangement covering the period July 1982-December 1983. On July 1, 1982 several key policy measures were taken: the dual exchange rate system was unified, the Somali shilling was devalued by 21 percent on the export side and by 51 percent on the import side in domestic currency terms; and the pegging of the Somali shilling was changed from the U.S. dollar to the SDR. The program also provides for the tightening of the fiscal and monetary policies by reducing net domestic credit to Government by 6 percent in 1982 and by 11 percent in 1983, and by reducing the rate of growth of domestic credit from 31 percent in 1980 and 17 percent in 1981 to 1 and 7 percent in 1982 and 1983, respectively. The Government also raised interest rates on all loans and deposits of the Central Bank and the commerical bank by 2 percentage points, for the third consecutive year. Given the high domestic inflation rate, however, the current interest rates are still negative in real terms. 4.04 The policy measures undertaken in 1981 and in 1982 have already had some positive impact in terms of effecting Somalia's stabilization objectives and, to a lesser extent, in stimulating commodity production. As was described in Chapter 3, both the current account and overall deficits in the balance of payments for 1981 were reduced. Simultaneously, the Government's recourse to the banking system was reduced and the domestic inflation rate fell. However, to a considerable extent the "improvement" in the balance of payments was attributable to the drop in capital and intermediate goods imports, while the improved Government budgetary position reflected the steep (41 percent in nominal terms) decline in development expenditure. Moreover, the reduction in domestic inflation was mainly attributable to the increased output of foodgrains, which was in turn due to unusually good rainfall; a large surge in imports under the franco valuta system, before its termination in November 1981, was also a factor in mitigating inflation in 1981. The inflation rate in 1982 is estimated to have fallen to about 30 percent, as compared to 59 percent in 1980 and 44 percent in 1981. 4.05 The recent policy changes are in any event a welcome development, and they reflect the willingness of the Government to make some hard decisions. Yet they represent only a first stage in the formulation and implementation of a policy agenda which must be directed simultaneously at restoring financial equilibrium, rehabilitating and making fuller use of existing agricultural and industrial productive capacities, and at 3/ See Statistical Annex, Table 6.7.  - 34 - restoring financial equilibrium, rehabilitating and making fuller use of existing agricultural and industrial productive capacities, and at establishing the foundations of long-term growth. Hard choices will continue to have to be made, for there are no easy solutions to Somalia's "stagflation". It is clear that Somalia has far to go both in terms of restoring the necessary degrees of balance in its finances and balance of payments, and in terms of stimulating production. The expansion of supply is of course a far preferable means of controlling inflation and restoring equilibrium than curtailing demand per se. But even with continuing high inflows of aid to ease the pain of the adjustment process, restrictive demand policies will be essential for some time. Hence an appropriate balance and blend of demand management vis-a-vis "supply-side" policy measures has to be identified and implemented. 4.06 This will call for choices to be made among the country-s economic objectives and for recognition by Government of the economic cost of pursuing social and political objectives. For example, the social objective of creating employment by means of guaranteeing public sector jobs for school leavers is not consistent either with the objective of restraining Government expenditures or the objective of augmenting output. Similarly, the objective of keeping food prices low through large food imports has to be weighed against the objective of stimulating domestic food production through offering adequate incentives to producers. And in the control of Government expenditure, choices have to be made between cutting unproductive expenditures and cutting development expenditures, which has so far been the category where a large proportion of the burden of adjustment has fallen. 4.07 These tasks of choosing amongst objectives, adjusting priorities and shaping new policies and instruments of economic management (including those which may reduce certain roles now played by the public sector) will in any event call for considerable staff work, including the preparation of policy option papers and action program documents for consideration at the highest levels of Government. This may call for some re-assignment of responsibIlities among the limited numbers of senior officials qualified to perform this work. It will also call for more and better technical assistance from donors.  - 35 - CHAPTER 5: NEXT STEPS IN POLICY REFORM 5.01 This chapter focuses on a few selected areas where the diagnosis of Part I suggests that further action and reforms are most urgently warranted. These reforms should be aimed, firstly, at demand management, through the control of excessive credit expansion and through improvements in balance of payments and external debt management. Secondly, as a key instrument of its overall economic management, a Medium-Term Recovery Program, including a realistic Public Investment Program, emphasizing quick-yielding projects and programs to rehabilitate existing facilities, needs to be formulated. Thirdly, measures are needed to create investment opportunities and offer incentives to mobilize the energies and resources of the private sector, including the savings of Somali emigrant workers. Fourthly, there is an urgent need for the preparation of a medium-term program for raising commodity production, both for export and import replacement. This will call for policy measures to improve resource allocation and capacity utilization and for projects and programs to augment the production base, particularly in the agricultural and industrial sectors. And fifthly, public sector wage and employment policies need to be rationalized. The following sections consider each of these areas for action in turn. A. Macro-Economic Management 5.02 This section concentrates on measures aimed at reducing the excessive expansion of demand and improving overall resource allocation both through improvements in budgetary, balance of payments and debt management and through the formulation of a public investment program. Budgetary Management 5.03 The Somali economy is currently taxed heavily.l/ Therefore, the scope for increasing revenues in the short- to medium-term is rather limited. Moreover, a heavier overall tax burden on the economy might well prove to be at the further expense of incentives necessary to raise production. The recent devaluation of the shilling is in fact already generating higher revenues from import duties, and there is in any event a considerable need both for rationalizing the tax structure and for improving tax administration. The present Somali tax structure, which is highly dependent on import duties, has evolved more in response to purely revenue-generation objectives than to considerations of equity and efficiency. Given these circumstances, the tax (and more broadly the revenue) system has inhibited efficient resource allocation, and to the 1/ See para. 3.07 and "Summary of the Tax System, May 1981 comprising Appendix II of the Staff Report for the 1981 Article IV Consultation, IMF, June 1981. Although this summary applied to the period before the 1981-82 devaluations and some subsequent tax adjustments, it still provides a useful description of Somalia's tax structure.  - 36 - extent that this has been a constraint on the growth of output and (taxable) incomes, so has it constrained the growth of the tax base itself. Thus, it is now urgent that the Government gives new priority to rendering its revenue structure more conducive to growth and efficiency. 5.04 As was noted in Chapter 3, little action has thus far been taken to implement the recommendations of a 1980 IMF tax survey which detailed many measures that would serve this end. The Government has stated its intent to work towards a simplification of the import tax structure, a rationalization of the income tax structure, and the development of a sales tax. These are surely worthy objectives and should receive high priority. But there is also an urgent need (particularly in light of the recent devaluations and in view of the constraints on the volume and composition of imports which Somalia can afford) for a comprehensive review of remaining tariff exemptions and an alignment of import duty rates according to efficiency criteria. S.milarly, the system of public enterprise taxation (particularly with respect to the rationale for turnover and depreciation taxes) needs to be re-aligned, and the scope for discretionary exemptions on all taxes needs to be reduced. At the same time, new measures should be taken to improve tax administration; these range from the provision of vehicles and fuel to tax collectors to improving training (including through a better use of technical assistance) of Inland Revenue and Customs Department staff. 5.05 The scope for reducing government expenditures is quite substantial, although it is recognized that the Government has limited degrees of freedom in this regard so long as defense and other security-related expenditures loom so large in the budget. But the Government has yet to make some hard choices in the allocation of budgetary outlays, and it needs to take additional steps to exercise controls on expenditures. In particular, it is recommended that attention be given to: (a) reducing allocations to the general administrative ministries vis-a-vis those ministries engaged in providing economic services; (b) abandoning the policy of creating employment through both the guarantee of employment to high school leavers and the hiring of excessive numbers of workers in public enterprises; and (c) tightening expenditure controls and the public accountability of ministries and public enterprises. Simultaneous with measures to reduce expenditures of the administrative ministries, it will be necessary to provide for more adequate outlays of local currency both to finance the recurrent expenditures of ongoing development programs and the local costs of development projects in gestation--which programs and projects have in the past two years borne a major brunt of tight fiscal and monetary policies. 5.06 In order to improve the overall management of public expenditures, priority should be given to: (i) strengthening the Ministry of Finance's capacity to analyze fiscal issues and improve budgetary processes, with particular reference to the needs to integrate planning and  - 37 - budgeting, prepare integrated development and recurrent budgets, and coordinate local currency budgeting with foreign exchange budgeting; (ii) preparation of a realistic multi-year Public Investment program, which will itself call for better financial analysis and financial planning at the macro-level; (iii) micro-level financial as well as economic analysis of projects; and (iv) a comprehensive assessment of the functions, operations and accounts of the public enterprises. This important work calls for close consultation and coordination between the Ministry of National Planning, the Ministry of Finance and the line ministries and agencies. Management of the Balance of Payments 5.07 In view of Somalia's limited prospects for substantially raising export earnings in the near-to-medium term, the still-high domestic inflation rate, and the excess demand for foreign exchange to finance recurrent imported inputs, the most important aspect of Somalia's balance of payments management is the need to maintain an appropriate exchange rate. Pending further changes in the exchange rate, however, consideration should be given to possible measures to mobilize the savings of emigrant workers and to improve the system of foreign exchange allocation. 5.08 The savings of Somali workers who have emigrated to the Gulf areas are potentially an important resource for the economy. During the franco valuta period these remittances became quite large, and since their counterpart was by-and-large imports of commodities bearing high duty rates, they generated considerable revenue for the Treasury. The July 1981 devaluation was expected to integrate the two (franco valuta and official) markets and result in the remittance of emigrant workers' savings through banking channels. This result has not been achieved yet. The lack of a banking habit and the absence of any banking network extending to the rural habitat of migrants' families is only part of the explanation.2/ A principal reason appears to be the perceived lack of a sufficiently attractive exchange rate, e.g. in view of the fact that as of May 1982 the black market rate of exchange was around So.Sh. 20 per U.S. dollar. In any event, Somalia must surely find the ways and means to better mobilize this important resource. Consideration should therefore be given to devising sufficient incentives and practical mechanisms both to increase the flow of workers' savings and to channel them into productive uses.3/ In this regard, the introduction in January 1983 of a bonus scheme, providing a 33 percent premium above the official exchange rate for workers' remittances, is a welcome development. 5.09 The scarcity of foreign exchange available to the Government also dictates a need to improve the system of foreign exchange allocation. It would be unrealistic to expect that Somalia would in the near future be 2/ The various types of informal relations as well as clan and kinship ties between emigrant workers and livestock traders may serve to mitigate some of the deficiencies of the banking network. 3/ Studies on these subjects recently done in Pakistan and Bangladesh, which also have large numbers of workers abroad, may be instructive in these regards.  - 38- able to completely liberalize foreign trade, even if it wanted to; much larger external assistance assured for a number of years will be requiLred to underwrite such a liberalization. But the present multi-level system for the control of import trade is cumbersome and inefficient. Somalia should therefore introduce a new system of annual foreign exchange budgeting (covering the requirements of public sector enterprises and the rest of the economy), prepared by an inter-ministerial committee of senior officials and based on good staff work. In allocating foreign exchange, high priority should be given to spare parts, raw materials, current production inputs, and equipment needed to carry out the program for economic rehabilitation and growth proposed below. The system should be made known to private importers and the procedure for issuing licenses and opening letters of credit should be simplified. Management of External Debt 5.10 As stated in Chapter 3, Somalia's external debt burden has reached a very high level which a stagnating economy cannot bear. The Government has already undertaken to minimize further contractions of loans on non-concessional terms (e.g. short-maturity, high-cost loans from private banks and prospective export credits). But the Government ani donors alike must be mindful of Somalia's inability to service even loans made on highly concessional terms unless the projects being financed are both economically viable on their own account and justified also in the context of realistic projections of the country's future debt servicing capacity. It would of course be in the country's interest if the Government could persuade some of its creditors to convert their loans into grants and otherwise to maximize the grant element of future capital inflows. 5.11 The following Table shows that, even if Somalia contracted no further debt after March 31, 1982, the debt servicing burden (relating only to debt contracted before that date) would still rise steadily in the coming years. Table 10: PROJECTIONS OF DEBT-SERVICE OBLIGATION ON PUBLIC DEBT OUTSTANDING, I/ 1982-1986 (Millions of US$) Total 1982 1983 1984 1985 1986 1982-86 Debt Owed to DAC countries 2.1 3.6 5.4 5.4 6.1 22.6 CPE countries 18.5 18.1 17.8 17.6 17.3 89.3 OPEC 17.2 37.3 34.4 34.4 31.6 154.9' Financial institutions 5.0 8.3 8.4 8.6 8.6 38.9 Multinational institutions 24.6 22.0 23.4 28.3 45.9 144.2- Other bilateral 0.5 0.5 0.5 0.5 0.4 2.4 TOTAL 67.9 89.8 90.0 94.8 110.1 452.7 1/ As of March 31, 1982 Source: Statistical Annex, Table 4.1  - 39 - 5.12 The Government has thus far been slow to adopt the debt management procedures recommended by successive Bank missions. A first step in this direction will be to give full powers and responsibility for external borrowing to one Ministry, the Ministry of Finance being the most appropriate locus. Greater communication and a better flow of information between the Ministry of Finance, the Ministry of National Planning and the beneficiary Ministries and/or agencies are also essential. The capabili- ties of the external debt unit in the Ministry of Finance should also be improved by enhancing the unit's status, by appointing high-calibre staff to the unit and by ensuring that such staff enjoy a longer tenure in their positions than has been the case so far. The Need for a Realistic Public Investment Program (PIP) 5.13 The central objective of the PIP should be to direct available resources to those development activities with the greatest promise for augmenting domestic commodity production, increasing exports, replacing imports and generating domestic revenues. The PIP should provide the central instrument for managing and monitoring the national development effort. It would subsume the current development budget, and along with the current budgets, would constitute the means by which available financial resources (both local currency and foreign exchange) would be channelled to their highest-priority uses. 5.14 Background. The nature and magnitude of the need for such an instrument of economic management lie in the shortcomings of both the planning and budgetary processes as they have been effected to date. Although Somalia has pursued economic planning for well over a decade and in the process prepared at least four development plans, the processes of economic planning and investment programming suffer from many weaknesses. The main weaknesses are: (i) that past plans have not been formulated in a macro-economic framework, with the result that investment programs were prepared in a vacuum and were neither coherent nor consistent with national development objectives; (ii) that there is no mechanism for rigorously assessing resource availabilities and feasible levels of investment, with the consequence that development budgets as well as the plans themselves have been unrealistically large and have thereby led to inefficient de facto resource allocation; (iii) that there has been no explicit linkage between the annual budgets and the development plans, or between the development and recurrent budgets; (iv) that the plans have not set forth well-defined strategies or policies to achieve the stated objectives, nor have they addressed adequately the scarcities of skilled managerial personnel--which resources also need to be rationed carefully and effectively; and (v) that the monitoring of implementation is most inadequate. 5.15 As noted earlier, the Ministry of National Planning has recently prepared a new Five Year Development Plan for the period 1982-86. At the time of preparing this report, the mission had access only to a preliminary  - 40 - version of this Plan. But unless there have been drastic revisions to the final Plan--which seems unlikely in view of the limited time and staff available to undertake such work--it may be concluded that the FYDP suffers from most of the weaknesses of previous Somali development plans. First, although the (draft) plan has the semblance of a macro-economic framework, this framework is not credible, and it suffers from internal inconsisten- cies; for example, the foreign exchange gap and savings-investment galp are not compatible. Second, the size of the investment program included iLn the draft Plan is based on an over-optimistic assessment of domestic and external financial resource availabilities. For example, the domestic savings rate is expected to rise from a negligible level in 1981 to about 13 percent of GDP in 1986. Projections of the balance of payments also appear unrealistic. For instance, exports are expected to grow, in real terms, at about 9 percent per annum, a seemingly impossible task when seen in the context of the present narrow export base and the prospective Lack of buoyancy in demand for livestock and bananas in the years ahead. Third, the rates of growth proposed for most of the sectors appear to be unrealis- tically high. For instance, value added in agriculture is projected to grow at 3.8 percent (compared to an actual growth rate of 1.7 percent in the period 1972-1978). Crop production is expected to grow at 4 percent (compared with a decline of 3 percent between 1972-1978). The livestock sector is targetted to grow at 3.7 percent, which would appear to run counter to the overall strategy of reducing pressure on the grazing a;rea. And the manufacturing sector is projected to grow at 8.5 percent, compared with a decline of 0.8 percent between 1972-78. Even with high aid flows and an aggressive implementation of policy reforms (which are themselves not specified in the Plan) such improvements in production performance appear beyond realization in the near-term. 5.16 Fourth, and even more importantly, neither the allocation of investment nor the selection of projects are clearly founded upon a systematic analysis of priorities or economic selection criteria. Projects which are said to have been "studied and at least partially funded" are lumped together to formulate the development program. The draft Plan includes numerous lumpy projects, including the Bardhere dam project, some other larger-scale undertakings, and many smaller projects of questionable viability, carried over from previous plans. 5.17 During discussions between the Bank and a high level Somali delegation which visited Washington in March 1983, the proposed Bardhere Dam project was discussed. In view of the extremely large size of the project and the high priority accorded to it by the Government, it was agreed that the Bank, possibly in coordination with other donors, would send a mission to Somalia in April-May, 1983. The purpose of this mission is to: (i) review the Government plans which have been prepared to date for the development of the Juba Valley in regard to irrigation and power; and (ii) to establish a framework for a technically feasible investment program, with a time frame of 10-15 years, that can be supported on the basis of (a) an evaluation of expected financial and economic costs and benefits; (b) the budgetary, institutional, and manpower resources of the country; and (c) the prospects for donor support.  - 41- 5.18 Guidelines for Preparation of a PIP. The need for and the basic objectives of a PIP, which should be prepared on a (rolling) three-year basis, have been outlined above. The following paragraphs set forth some general principles which should guide its preparation. 5.19 In determining the size of the PIP for each of its three years, the starting basis should be realistic projections of potentially available domestic and external resources. Setting the financial parameters of the PIP is essentially an excercise in forward budgeting, which also requires realistic assumptions to be made concerning the claims on total foreign exchange and local currency to be made for non-development uses. And since in any budget the prospective sources and uses must balance, the next task is to ascertain those uses or "requirements" (both for foreign exchange and local currency) in light of the needs of already-completed projects, the claims of on-going projects, the prospective readiness of economically- viable projects, and the country's implementation capacities. It is then desirable to identify: (i) a "hard core" of expenditure priorities in such a way that these could be achieved even in the face of a "pessimistic" outcome in terms of resource availabilities; and (ii) a list of "second tranche" priority projects which could be implemented within the PIP, should additional resources become available. 5.20 Projects for inclusion in the PIP should be evaluated in terms of their economic rates of return and/or net present economic values, and only high ranking projects should be selected. To facilitate a more rigorous evaluation of projects, a study should be undertaken to derive a set of shadow prices for Somalia. In Somalia's present economic situation, where there is considerable underutilization of existing productive capacities, a presumptive judgment is that rehabilitation-type and relatively small-scale projects should have high rates of return, i.e. those geared to rehabilitation of the agricultural sector for augmenting production of foodgrains and cash crops, and those geared to rehabilitation of industrial projects which can become economically viable. A comprehen- sive review of the portfolio of ongoing projects should be carried out, and only those projects which fulfill the above criteria should be retained in the PIP. New projects in the PIP should be restricted to those (projects) which fulfill the criteria, with the addition of some infrastructure facilities to support production for export or import replacement. 5.21 The Ministry of National Planning (MNP) should have the overall responsibility for the preparation of a realistic PIP. To enable MNP to provide the intellectual and managerial leadership for this purpose, the MNP should be strengthened by improving its capacity for macro-economic planning and policy analysis. The Ministry should also improve its capacity to assess the financial as well as the economic viability of projects, and to assess the longer-term budgetary implications of any proposed PIP. It is also necessary to strengthen the planning capabilities in line ministries and agencies. There is an immediate need to improve coordination between MNP, MOF and the technical ministries in regard to foreign financing, to ensure that commitments are made only with due regard to overall national priorities and are consistent with sound budgetary, balance of payments and debt management practices. Consideration should be  - 42- given to the establishment of a Resources Committee, consisting of high-level representatives of the MNP, MOF and the Central Bank, with responsibility to review and agree upon projected foreign and domestic resource availabilities as a framework for development planning, public investment programming, and annual budgeting. 5.22 In March 1983, when a Somali delegation held discussions with the Bank in Washington, it was agreed that the Government will prepare a Medium-Term Recovery Program and that a joint Bank/IMF mission would visit Somalia in May 1983 to assist the Government in this regard. B. Mobilization of Private Initiative and Resources 5.23 It has increasingly come to be appreciated by many Somali officials that the capacity of their administration is overstrained by the dual tasks of managing extensive public sector activities and trying to guide private sector activities through extensive direct controls. The experience of the past decade clearly points to the conclusion that, if the economy is to grow, the private sector has to play a more active and more effective role in industry and services as well as agriculture. Indeed, this is a truism insofar as even a rapid growth in value-added in the public sector would not compensate for slow growth in the private sector, given the still-preponderant size of the private sector (vis-a-vis the public sector) in terms of employment and income generation. A more effective fostering of private sector effort, initiative, productivity and investment would call for measures on several fronts, including: clarifications of policies (and in some cases amendments of laws and regulations) defining the scope for private sector activity, including direct private foreign investment and joint ventures; a rationalization of tax, tariff, subsidy--and most importantly pricing--policies to improve incentives and make them more consistent with efficient resource allocation; a streamlining of bureaucratic procedures impinging on private sector activity; a replacement of direct, administered controls by indirect controls at a more macro level; a release of under-employed public sector staff to permit their engagement in higher-productivity private sector employment; a more effective direction of public sector resources--both financial and human--to directly productive uses in the commodity producing sectors; and achieving a more effective use of foreign aid, including technical assistance, in the interest of promoting directly-productive private sector activities. 5.24 This does not imply that the public sector should play a more "passive" role vis-a-vis the private sector, but rather that it should concentrate its capabilities more in areas where the private sector cannot perform certain necessary and important tasks, e.g. infrastructural development, education and other social sector development, improvement of the management of existing commodity-producing enterprises and overall management of the economy at a macro-economic level. These tasks are themselves quite sufficient to over-strain the public administration. 5.25 A growth-oriented development strategy must also ensure that the vast majority of agricultural producers, who remain in the private sector,  - 43- will have better access to essential inputs, extension services, infrastructural facilities and credit. This will call for adequate allocations of foreign exchange needed for recurrent inputs, an upgrading of research and agricultural extension activities, an increased emphasis on small-to-medium scale and quick-yielding projects in agriculture, and the allocation to agriculture of a larger share of credit than has heretofore been made available. All of these activities will call for more and better public sector efforts and activities which can only be carried out by a re-direction of those activities, namely by giving higher priority to production-oriented tasks (such as those listed above) and lower priority to state interventions in marketing and distribution, where public sector employment is particularly inflated and where past interventions appear to have been counter-productive. 5.26 In recent months the Government has in fact "allowed" farmers to sell small quantities of grains to private traders, thus reducing ADC's monopsony powers. Yet this "liberalization" has not been based on any policy pronouncement, and under the law of the land ADC's monopsony remains unchanged. Such signals for liberalization in this and other areas, through default of law enforcement or "through the back door", are not enough to encourage private business. Prospective entrepreneurs still have uncertainties regarding the policies and intentions of the Government, especially in light of occasional pronouncements asserting the continued predominance of the public sector. A clear statement of policy (changes) in regard to encouragement of private economic activity is essential for clarifying the current confusion and for allaying fears that the recent trend of "liberalization" is only transitory. In recent years, a number of Somali traders have accumulated considerable capital, especially during the franco valuta period, and some appear keen to venture into construction, manufacturing, tourist services, and even commercial agriculture. In order to harness the energies and resources of such prospective entrepreneurs, the "signals" (including the critically-important price signals) have to be both clarified and rationalized. To this end, a clearly-enunciated industrial and investment policy should be formulated and pursued to attract private foreign investment. It is not to be expected that foreign investors will be overly enthusiastic to enter the Somali economy. Yet there is some potential in new projects, especially in fisheries and crop production. Foreign investment need not be confined to joint ventures. In fact, wholly private direct foreign investments could be more beneficial to the economy insofar as they involve less protection, subsidies or other assistance from the Government. C. Actions to Increase Agricultural Output and Exports Crop Production and Exports 5.27 In crop production, priority should be given to measures designed to increase production relatively quickly and at low investment cost. These should broadly include rehabilitation of irrigation facilities and improvement of water management in the controlled irrigated areas. In rainfed areas, emphasis should be given to rehabilitation and intensifi- cation measures designed to achieve better land preparation, improved  - 44 - seeds, better plant density, and improved post-harvest technology. Resources permitting these high-priority activities should be supplemented by infrastructural investments to expand the rainfed cropping area. 5.28 Somalia's principal foodgrains--sorghum and maize--are produced on an estimated 540,000 hectares of rainfed land, and about 110,000 hectaLres of flood irrigated land. In addition there are 50,000 hectares of controlled irrigated land in the South--of which about 30,000 hectares are used for maize and rice, the rest for sugarcane, bananas, cotton, and fruits and vegetables. About 600,000 persons are engaged in rainfed agriculture and over 200,000 persons on irrigated lands. There are about two million hectares of good quality rainfed land suitable for cultivation, but these are currently unused because of their remoteness from settled areas and the lack of infrastructure. An expansion of peasant cultivation on the vast unused rainfed lands would permit output growth with equitable distribution and at a fairly low investment cost.4/ The main obstacle to such expansion was thought to be the limited willingness of nomads to shift to settled agriculture. But, as will be argued later, there is now reason to believe that investment in infrastructure and an altered structure of incentives would attract more people to new rainfed areas which provide perhaps the most important resource for the country's long-term development. 5.29 In rainfed areas, present yields are extremely low--about 300-400 kg of maize or sorghum per hectare. In controlled irrigated areas, average maize yields are as low as 800 kg per hectare (see Table 11). A few better farmers reportedly obtain about twice these averages. Even with the technology now available in the country, yields can be doubled or trebled with better extension services, increased input supplies, and attractive producer prices. Hence, more resources are needed to support expanded extension work and related implements, improved seeding and planting practices, weed control and post-market grain storage and handling. The results of these activities would emerge gradually over a substantial time period. 4/ According to some crude data in the Agricultural Sector Review, opi. cit., expansion of irrigated farming would require investments of the order of US$7,500 (in 1979 prices) per hectare compared to an estimated $3,000 for rehabilitating one hectare of presently irrigated land, for roughly similar benefits. In the rainfed areas, indicative costs of rehabilitating currently cultivated land were estimated at about $300 per hectare, whereas costs of opening up new land were estimated at about $600 per hectare, for similar benefits.  - 45- Table 11: AVERAGE CROP YIELDS COMPARED WITH YIELDS UNDER "BEST PRACTICE" Average Yield Yield Under Area ton/ha. "best practice" ton ha. Rainfed Maize 0.3 0.6 Sorghum 0.4 0.8 Controlled irrigated Maize 0.8 2.5 Rice 2.0 3.0 Bananas 15.0 30.0 Sugarcane 45.0 75.0 Sesame 0.3 1.0 Cotton 0.7 2.5 Source: World Bank, Agricultural Sector Review, Report No. 2881a-SO, June, 1981. 5.30 Although it is still too early to say whether the results will justify new investments, there are some interesting trials in mechanized dryland farming taking place under a World Bank-financed Drought Rehabilitation Project. The main technique being tried is to allow the soil to accumulate moisture during two sucessive seasons, before cultivating it with the aid of various tractor-drawn implements. Water is also injected into the soil at planting to facilitate germination. Among the main crops which are being tried are sorghum, maize, sunflower, cotton and cowpeas. The results so far are only available for two seasons, and there were numerous technical problems with the trials. But if the technology (which is based on Australian dryland farming methods) can be proved viable--technically, financially, and economically--it might offer a feasible technology for some horizontal extension of rainfed farming in Somalia. Due to the capital-intensive nature of the technology, however, it is unlikely that it would create much employment. 5.31 In the controlled irrigated areas, use of resources to clear and rehabilitate the irrigation network and to improve water management deserves high priority. As was noted in Chapter 2, in several areas channels have been choked with weed growth, resulting in excessive seepage through embankments and water-logging on nearby lands. Upstream lands often use excessive water which is still provided free, while downstream areas are often deprived of water. There is at present no system to allocate water, which is the most scarce resource for maximizing agricultural production. Rehabilitation of the irrigation network, and improved water management, can increase effective acreage considerably.  - 46 - Water charges should be introduced, not only to recover part of the coist, but also to induce more productive use of this scarce resource. Along with the rehabilitation of banana plantations, improvement of input supplies (fertilizers, pesticides, etc.), provision of extension services (especially for small farmer producing maize and cotton), and the maintenance of attractive producer prices, these measures would substantially increase the yields and production of foodgrains, bananas, sugarcane, cotton, and other crops over the next four to five years, and help to mitigate the present crisis in production and in the balance of payments. 5.32 Steps also need to be taken to improve the operative efficiency of State farms. Conceived as highly-capitalized, high input/high output activities using controlled irrigation, the State farms represent a sizeable investment, the full benefits of which have not yet been realized because of low productivity. This has introduced an undesirably high degree of mechanization, even in low value crop production, with large current import requirement for tractors, spares and fuel oil. Although the State farms received most of public sector resources allocated to agricul- ture, average yields are still only about 800 kilograms per hectare for maize, 300 kilograms per hectare for sesame, 700 kilograms per hectare for sugarcane. Yet, the technology currently employed on these farms should permit yields two-to-three times these averages. In the short run, the achievement of higher yields will depend largely on better management; consideration should be given to importing the necessary skills in the form of management contracts. In the longer term, improved input supply systems, training and incentives for local staff will be important. 5.33 The almost complete absence of animal power for tillage and haulage in a country which raises millions of animals which can be easily trained for such work, is remarkable indeed. Extension and training programs to introduce animal power in agriculture, and to augment the supply of animal-drawn implements (if needed initially through import) should be intensified. Animal traction will help to raise the area cropped, and hence, output, per farm family. It will also help achieve the much-desired integration of crop and livestock activities. It should be noted, however, that these efforts and measures are likely to yield substantial results only in the medium- to long-term. 5.34 As was emphasized in Chapter 3, one of the most important reasons for the dismal past performance of commodity production was the erosion of financial incentives and inappropriate exchange rate and pricing policies. Hence, it is essential that the Government take new measures to provide and maintain strong financial incentives to producers. A major move in the right direction was made with the devaluation and upward revision of producer prices in early 1981. However, following the 1982 unification of the exchange rate and devaluation, the producer prices for agricultural crops were not revised. As data in Table 12 show, as of now, the gap between domestic producer prices and the import parity price (calculated at the exchange rate effective in July 1982-but unadjusted for internal transportation or marketing costs), is not very large. When internal  - 47 - transportation and marketing costs are added to producer prices, this apparent gap would be narrowed. However, in the absence of adequate data on the precise amounts of these costs, and in view of the effects of the 1982 devaluation and continuing inflation on the cost side, it is not now possible to make firm judgments regarding the adequacy or inadequacy of the incentive structure. Table 12: DOMESTIC PRODUCER PRICE AND WORLD PRICE OF SOME AGRICULTURAL PRODUCTSs--1982 (A) (B) (C) February 1982 world market price Estimated ADC's per quintal landed cost producer price (f.o.b.) (c.i.f.) per quintal at 15.00 So.Sh.=$l at Mogadishu Maize So.Sh. 180/q So.Sh. 168/q So.Sh. 273/q Sorghum So.Sh. 160/q So.Sh. 168/q So.Sh. 258/q Rice So.Sh. 490/q So.Sh. 484/q So.Sh. 619/q So.Sh. 510/q (Thailand) Cotton So.Sh. 291/q So.Sh. 204/q So.Sh. 354/q Sources: Column (A): Government of Somalia, Ministry of Agriculture. Column (B): World Bank, Commodities Division Column (C): Assuming freight and insurance per ton at: US$60 for sorghum, US$70 for maize, US$90 for rice, and US$100 for cotton. 5.35 The maintenance of attractive producer prices, along with other measures mentioned above, could be expected to result in a substantial increase in crop production in the short- to medium-term.5! In order to encourage production, it is important to maintain domestic producer prices close to (trend) import parity prices and these producer prices should be periodically revised to take account of changes in import prices, costs of production and changes in other prices in the economy. Data on costs of production of various crops should be collected, and a formal institutional I 5/ Several studies have estimated significant price elasticities of supply in Eastern Africa (wheat and maize in Kenya; cotton in Uganda and Tanzania; and sorghum in Sudan). The presumptive evidence is that Somali producers are no less sensitive to prices than produders elsewhere in Africa. See, for example, H. Askasu and J. Cummings, Agricultural Supply Response: A Survey of the Econometric Evidence (N.Y.; Praeger, 1976).  - 48 - mechanism set up to make regular and frequent reviews of producer prices. In addition to foodgrains, this review of producer prices should cover bananas, sesame and cotton. 5.36 The July 1981 devaluation of the shilling allowed increases of domestic producer prices of bananas which are handled through a public monopoly, i.e. the National Banana Board. However, the Board's own tentative estimates6! show that this left the grower with a small return which would have disappeared with the unification of the dual exchange rate (since imported inputs are no longer available at the "subsidized" rate of So.Sh. 6.3=US$l). Hence, there is need for a further adjustment of banana producer prices. Because of quality differences, Somali bananas fetch much lower f.o.b. prices than, say, Central American bananas. This factor also has to be considered while setting producer prices, while efforts are made to improve quality. At the same time, yield improvement and cost reduction are crucial for producer prices to be attractive to growers.7/The costs of packing of Somali bananas are over 50 percent of the current producer price, because of the high cost of local production of packing material. Reducing this cost deserves immediate attention.8/ Moreover, the operations of the National Banana Board (ENB) should be rationalized to reduce costs of transportation and marketing, so that the growers could get the maximum possible price and income. 5.37 There is also a need for reforms in the present marketing and distribution arrangements for other crops as well. In particular, ADC's legal monopoly of grain purchases should be eliminated and farmers given freedom to sell in the open market. The ADC should gradually change its main role to price support and stabilization--intervening in the market to buy (or sell) when prices tend to fall (or rise). The policy of keeping food prices low (through low producer prices) and distributing food through the ADC and ENC has essentially served the interest of the small urban population, at the cost of domestic production and farmer incomes. Somalia can no longer afford to neglect the negative impact of this policy on production. A reversal of this policy would mean some hardship, mainly to poor urban consumers. But this has to be weighed against the expected 6/ See Statistical Annex, Table 7.3, which shows average costs and relturns of banana growing. 7/ Average yield declined from 23.7 tons/ha in 1972, to 12.5 tons/ha in 1978. 8/ Total costs of banana exports are distributed as follows (in So. shillings/quintal) Producer Price 170.00 Packing 90.00 Stamp tax and other charges 19.50 Internal transportation 15.50 Banana Board service charge 20.00 Total (f.o.b. for exports) 315.00  - 49 - production gain, and the eventual greater availability of food supplies to urban consumers. Scarcity and rising prices have already hurt ordinary consumers because ENC supplies food and other essentials at low prices mainly to selected category of consumers. ADC's supplies through local governments are inadequate and the actual prices at the retail level are way above the prices at which local governments are supposed to sell to retailers.9/ 5.38 In sum, the following measures are suggested to improve resource utilization and to raise crop production and exports: (a) rehabilitatation of the irrigation network and introduction of water management measures; (b) reliance on small farmers for intensive farming together with improved management of State farms; (c) rehabilitation and intensification measures in the already- cultivated rainfed areas, and (resources permitting) establishment of infrastructure to open new areas; (d) provision of more adequate financial incentives to the farmers; (e) elimination of ADC's legal monopoly of grain purchase; and (f) rationalization of the costs of ADC and the Banana Board. Livestock Production and Exports 5.39 In the livestock sector, as the Agricultural Sector Review of 1981 suggested, high priority should be given to activities having an immediate impact on production and export and should aim at increasing the productivity of past investments. By and large, the allocation of resources for these activities should take precedence over new investment for longer-term development of this sub-sector. The high priority measures should focus on animal health and market infrastructure. These measures should aim at reducing the risk of outbreak of diseases by providing a more regular and adequate supply of drugs along stock routes and in holding areas as well as through improved health services and other facilities at shipping points. 5.40 Measures should also be taken to remove bottlenecks in transport and shipping, and to improve port facilities and holding grounds in order to achieve an improved flow of animals to export markets. In particular, the present elaborate and cumbersome chain of controls, fees, and certification, should be rationalized and simplified. In the near term, 9/ The ADC sells to the local governments at prices considerably higher than producer prices; yet ADC can hardly break even. The local governments (under the law) are supposed to add no more than So.Sh. 3 per quintal when selling items to retailers.  - 50 - the off-take rate of animalsl/ and hence livestock exports, could be increased through improved veterinary services, marketing services ancL facilities. Owing to the clear and present danger of further deterioration of the rangelands, however, the national herd should not be expanded in the foreseeable future. This means that increased offtake will have to come from productivity increases. 5.41 Although reliable data on livestock production costs and profits are not available, the decline in 1981 livestock exports constitutes presumptive if not firm evidence that the combination of measures (devaluation, abolition of underinvoicing and imposition of a livestock export tax) implemented in mid-1981 reduced the profitability (or at least the perceived profitability) of livestock export as compared to the franco valuta period. In response to these combined measures, livestock exporters halted their shipments until, following negotiations, the Government acted to change the tax base. Livestock trade being highly competitive, it is generally assumed that changes in traders' profits directly affect the prices received by livestock growers. Hence, in view of the importanc:e of livestock exports in the balance of payments, it is essential that the effective exchange rate (i.e. the combination of the nominal exchange rate and taxes or subsidies) to livestock exporters be maintained at a level sufficient to provide adequate incentives. It is not now clear whether or not the July 1982 devaluation, in conjunction with current tax rates, invoicing practices and changes on the cost side, has served to render these incentives fully adequate. In view also of the continuing impact of inflation on costs and "wage goods", the adequacy of incentives will iin any event have to be monitored carefully and frequently. Fish Production and Exports 5.42 In the fisheries sector, there is considerable potential for both increasing output and exports. The Ministry of Fisheries has recently made a number of policy changes. For instance, as against the policy of supplying fishing vessels free of charge to cooperatives, these are now made available for purchase by individual fishermen. Encouragement has also been given to foreign companies to seek equity participation in commercially-oriented fishery ventures. However, further steps need to be taken to: (a) develop on-shore marketing and infrastructure facilities; (b) assist fishermen in acquiring needed supplies (boats, gear, credit, etc.); (c) introduce training programs geared to assist the artisanal fishermen in increasing their productivity; and (d) protect deep-sea fishing that proves successful, to avoid an overexploitation of the fish resources. 10/ It is currently estimated to be 3 percent for camels, 7-11 percent for cattle and about 15 percent for sheep and goats.  - 51 - D. Measures to Raise Output and Improve Efficiency in Manufacturing 5.43 In the manufacturing sector, relatively large past investments have yielded poor results. Given the preponderance of agro-processing enterprises in the manufacturing sector, the diagnosis in Chapter 3 attributed much of the cause of poor performance of the sector (as reflected, inter alia, in low rates of capacity utilization) to insufficient supplies of agricultural raw materials. It follows, then, that the Government's first priority for action to raise capacity utilization and to improve (at least cost) the performance of Somali industry should be to improve incentives and otherwise overcome the previously-identified constraints to agricultural production. But this is not a sufficient condition, even for overcoming the specific constraint of inadequate supplies of agricultural raw material inputs, since the adequacy of these supplies will depend not only on the volume of their production but also on the adequacy of the purchase prices offered by the enterprises. In some cases the Government has set low purchase prices, whether to keep consumer prices down or to ensure profitability (minimize losses) of the enterprises. But these objectives have been pursued at high expense to the economy, and there is an immediate need to rationalize these pricing policies in the interest of raising output, both agricultural and industrial. 5.44 Also on the supply side, the operation of many enterprises is also constrained by the inadequacy of imported materials -- spare parts, fuel, and other current inputs. High priority should therefore be given to the allocation of foreign exchange to finance the purchase of these materials. A rough estimate recently made by the Ministry of Industry indicates that for 12 major public sector manufacturing enterprisesll/ (excluding the oil refinery which has been provided crude oil by Saudi Arabia on a grant basis) the current input cost in foreign exchange (in 1982 prices) is about $36 million per year. The gain in output should be much larger, and much of it would represent foreign exchange savings or earnings. 5.45 In some of those enterprises which were overbuilt or poorly designed or for which the constraints are more on the demand side, the Government may be in effect 'locked into' bearing the consequences of wrong decisions made in the past, and it must now face the difficult choice between shutting them down or subsidizing them--whether directly or indirectly--indefinitely. Some may perhaps be made viable through selective balancing, modernization and rehabilitation programs. But clearly the Government must avoid the danger of throwing good money after bad in expensive new undertakings to validate what are inherently uneconomic ventures. 5.46 Similarly, where forward linkages among industries or between industry and agriculture are relevant, it must also avoid pursuing pricing policies which may diminish the profitability of viable enterprises. For 11/ These included Jowhar Sugar, Somaltex, Cigarettes and Matches, Kismayo Meat Factory, Milk Factory, Oil Mill and Ace Tannery.  - 52 - example, it is certainly not in the country's interest to require banana exporters to diminish their competitiveness by bearing the full high costs of the domestic packing-materials industry. 5.47 As with Somalia's other public enterprises, those in the manufacturing sector are pursuing a variety of economic and non-economic objectives, some of which are clearly at cross purposes. A rationalization of their operation will therefore require a very hard scrutiny, in light of the country's extreme scarcity of financial resources, of the sustainability of these multiple objectives. Among other things, the multiplicity of objectives makes it impossible to monitor and judge performance, or to introduce financial discipline in their operations. But the essential point is that the country can no longer afford to allow them to emphasize objectives other than the maximization of national economic profitability--which is not to be confused with financial profitability per se. Measures should also be taken to introduce substantial enterprise level autonomy in management- with regard to prices, wages, employment and output policies. Since there is little or no cost accounting, public enterprises have little or no basis for making pricing decisions. ThLey should introduce cost accounting and also adopt the same unified system of accounts. 5.48 An improvement in the internal efficiency of the enterprises will further require an overhaul of the present system of incentives. The present system in public enterprises should be changed to more closely relate remuneration schedules at all levels with job responsibility and performance. In many enterprises, there are far more workers on the payroll than are required, indicating an obvious need for a reduction of the enterprise labor force. For instance, Somaltex has the most modern looms and spindles and yet employs too many workers--a remarkable combination of high capital-intensity and high labor-intensity.12! Enterprises which cannot be made economically viable should be abandoned. And in view of the general over-extension of the public sector, the emigration of skilled people, and the pervasive demoralization of public sector employees, the possibilities of divestiture should be carefully studied. In view of the emergence (during the franco valuta period) of a group of enterprising Somali businessmen, this option, especially in the services sector enterprises (e.g., hotels) may in fact prove to be more feasible than was previously the case. Some enterprises, on the other hand, could benefit from entering into management contracts in which foreign managers could play a major role not only in improving efficiency 12/ The factory has 152 fully automated looms imported from Switzerland and 300 workers are operating these looms. In Switzerland, no more than 10 workers would be employed for the same job. More examples can be cited. At Jowhar sugar fatory, although sugar output has dropped sharply, there has been no drop in the number of workers. In a subsidiary project of Jowhar sugar factory, seven woemn workers were filling plastic bottles with perfume, a job that would be easily done by one worker in other developing countries.  - 53 - in the short run but also in training Somali staff, a benefit that could offer a high rate of return in the longer run. 5.49 It is further recommended that the Government should give consideration to the appointment of an inter-ministerial task force to review the performance of public enterprises (including but not limited to those in the manufacturing sector) and formulate an action program to improve their performance; such a program should provide for the establishment of a permanent monitoring mechanism.13/ E. Public Sector Wages and Employment Policies 5.50 The need for changes in wage and employment policies applies to the Central Government as well as to the public enterprises. There are certain interrelated issues which need to be tackled simultaneously. To improve the morale of the public service, in spite of the financial cost involved, salaries in the Government and parastatals should be (selectively) revised upward to offset at least a part of the erosion in real wages caused by inflation, especially in the case of higher level employees whose nominal salaries have remained unchanged over a long period. At the same time, and to mitigate the financial costs of the salary increases suggested above, the numbers of redundant employees need to be reduced, and the policy of guaranteed employment to school leavers should be discontinued immediately. This policy has resulted in extensive indiscipline, absenteeism and moonlighting in the public services. It has also created shortages of labor for various types of more productive work in rural areas--whether channel clearing, water management, extension service, or agricultural work for commercial crops. What is needed, therefore, is a reallocation of workers from not-so-productive employment in Government and parastatal enterprises to more productive employment in agricultural and infrastructural development. To bring about the desired reallocation of labor, relative incentives have to be changed. The present bias towards providing cheap food and other services to the urban areas (while neglecting the rural areas) should be reduced. Such a reordering of incentives, together with the provision of some other facilities (such as credit), should be used to encourage both the unemployed and underemployed to relocate and to engage in rainfed agriculture as individual farmers. 13/ In December 1982, the Government set up an intra-governmental commission composed of representatives from the Ministry of Finance, Ministry of Commerce and other ministries responsible for various public enterprises in order to evaluate the financial position of the public enterprises and to indicate which public enterprises should be phased out of operation.  - 54 - CHAPTER 6: MEDIUM-TERM PROSPECTS 6.01 The task of making any quantitative projections for Somalia-s economic prospects over the medium-term is extremely difficult. This is primarily because of the poor state of its economic and statistical data. As noted in the Preface to this report, there are major problems with much of the published data, including statistics on balance of payments.l/ 6.02 However, despite severe deficiencies of statistical data, an informed judgment about the magnitude of financial resource availabilities and their uses is of critical importance for a proper appreciation of Somalia's medium-term prospects. This chapter provides some quantitative projections of Somalia's economic prospects, with primary focus on the balance of payments over the period 1982-1986. An attempt has been made to present somewhat optimistic medium-term prospects on the assumption that the turnaround in economic policies initiated by the Government since early 1981 will be vigorously pursued and extended. In other words, the projections are highly "normative". 1/ Although data concerning foreign exchange reserves are deemed to be reasonably reliable, statistical information concerning exports, imports and inflows of foreign grants and loans and their use are incomplete and in many cases unreliable. The exporters of live animals are officially allowed to underinvoice these exports, while data on imports, whether under the franco valuta system (now abolished) or against external assistance, are neither complete nor reliable. It is generally believed that the values of both exports and imports as well as aid inflows are under-recorded. Moreover, recorded remittances by Somalis working in neighboring oil-rich countries are negligible; whatever is remitted comes through unofficial channels. For example, for the period 1977-1980, there was a large excess of foreign exchange resources available to Somalia (export earnings plus grants, loans and private transfers) as shown in OECD publications, over the use of foreign exchange (imports, debt service payments or net accumulation of reserves) as reported in Somali official statistics. Data assembled in Statistical Annex Table 3.17 show that for the period 1977-1980, the excess of foreign exchange resources available to Somalia over the uses of foreign exchange ranged from the low of $51 million in 1979 to the high of $169 million in 1977. In other words, net capital inflows apparently exceeded the current account deficit on the external account (plus reserve changes) during the period. A more probable explanation of this obvious accounting anomaly is poor bookkeeping and under-recording of a substantial quantity of imports (probably in Government account). Furthermore, in the absence of official national income accounts, it is not possible to relate the future growth of imports, and the growth of Government revenues and expenditures to the growth of the gross domestic product.  - 55 - 6.03 Despite the relatively poor resource endowment of the country, considerable increases in production and exports can be achieved if resources are allocated to the most productive uses as noted in Chapter 5. In the absence of such a policy framework, even a substantial flow of external assistance would not help in stimulating the growth of the economy. However, if the policy measures and institutional reforms suggested earlier are implemented for rehabilitating and expanding the productive base of the economy and utilizing existing capacities, external assistance over the medium-term could play an important role in bringing the economy out of the present economic and financial crisis and help in making the adjustment process less painful. On the other hand, the process of adjustment without substantial external assistance would require a sharp reduction in imports, with seriously adverse effects on productive activities and on the consumption levels of the population. Foreign Exchange Prospects 6.04 Somalia's balance of payments in the medium-term are summarized in Table 13. The projections assume that: (i) agricultural value added would increase at a moderate pace of 3 to 4 percent per year; (ii) with increased utilization of capacities, value added in the industrial sector would increase at about 8 to 10 percent per annum; and (iii) total gross domestic product would grow at roughly 3.5 to 4 percent per year. While these growth rates are well below those which the Government hopes to achieve and which are targeted in the Five Year Development Plan 1982-86, their achievement would in fact represent a substantial improvement over Somalia's growth performance during the past twenty years. The Bank's projected growth rates are therefore "roomative" in the sense that their achievement is based upon a premise that the Government's policy framework will be amended so as to facilitate a more efficient allocation of resources than has characterized the recent past. Whether in fact Somalia will achieve lower or (hopefully) higher growth rates in the remainder of the 1980s will depend to a very large extent upon the speed and deter- mination with which the Government proceeds to prepare and implement a Medium-Term Recovery Program that concentrates on projects aimed at export promotion, import saving, and augmenting the capacity of the productive sectors. 6.05 The methodology used for making the projections is given for individual items in some detail in the Annex to this chapter. In general, it is assumed that for export of Somalia's two major export items, market is not a constraint. Consequently, the level of exports would be a function of output growth which itself would be determined by the maintenance of incentives recently provided to the livestock and banana exports and the implementation of recommendations in Chapter 5 of this report. The price of exports in the world market is based on World Bank price projections. 6.06 Foreign Exchange Requirements. The basic criteria underlying import projections are: (a) to ensure adequate food availability for the population (including refugees) but to change the food import basket by reducing the consumption of high value foodgrains, such as rice and wheat;  - 56 - (b) to restrain import of non-food consumption goods; (c) to allow a more rapid growth of intermediate goods' imports in the interest of recommended policy for the rehabilitation and consoldiation of existing stock of capital; and (d) to permit a moderate increase in capital goods' imports during the period under consideration. The criteria for projecting otlher items of the balance of payments are given in the Annex to this Chapter. While it is easy to argue for larger requirements of imports for improving the performance of the economy, the level of imports that can be productively used is seriously constrained by the acute shortage of managerial talents and skills and by weaknesses in macro-economic management. Somalia's capacity to support a large investment program with substantial import needs is also constrained by the very low level of domestic savings; in fact, in the recent past the entire public investment program (foreign exchange and local currency costs) was financed by external assistance, with hardly any contribution from Government budgetary resources. These constraints, coupled with the limited availability of foreign exchange, underscore the need for improving the country's fore:Lgn exchange management system (see para. 5.09) to ensure that import needs of high priority investment programs are fully met.  - 57 - Table 13: BALANCE OF PAYMENTS PROJECTIONS, 1982-86 (In Current US $ Millions) 1982p 1983 1984 1985 1986 Exports, f.o.b. 133 158 177 198 217 Live Animals 98 117 130 144 155 Bananas 11 13 16 19 23 Hides and Skins 7 9 10 12 13 Other 17 19 21 23 26 Imports, c.i.f. 433 451 499 535 573 Food 133 127 137 146 155 (o/w for refugees) (70) (70) (70) (70) (70) Nor-Food Consumer Goods 55 59 63 67 72 Fuel Oils 65 68 74 75 77 Other Intermediate Goods 70 80 89 98 107 Capital Goods 110 117 136 149 162 Trade Balance -300 -293 -322 -337 -356 Non-factor services, Net -8 -9 -10 -10 -11 Resources Balance -308 -302 -332 -347 -367 Factor Services, Net (mainly interest payments on loans) -19 -21 -23 -25 -27 Private Transfers 20 40 60 80 100 CURRENT ACCOUNT BALANCE -307 -283 -295 -292 -294 CAPITAL ACCOUNT 307 283 191 134 83 Official Grants: 185 209 148 125 128 (a) Food Aid 81 78 75 80 88 (b) Other Commodity Aid 72 81 23 5 - (c) Project Aid 32 50 50 40 40 Disbursement, MLT 127 128 91 65 30 Amortization -46 -66 -70 -65 -79 Capital, n.i.e. net 68 36 22 9 4 Net Accumulation of Reserves -27 -24_ 0 0 0 OVERALL GAP TO BE FINANCED 0 0 -104_ -158 -211 Additional Aid Commitments Required 0 0 277 168 284 Memo Items Reserves levels (as months of imports) 1.6 2.2 2.0 1.8 1.7 Debt Service Ratiol1 36.2 41.1 37.0 35.2 36.9 Refugee Aid ($ mln.) 105 105 105 105 105 Note: For general assumptions and basis of data, see Notes in the Annex to this Chapter. p = provisional estimate; at the time this report was prepared, data concerning the actual outcome for 1982 were not yet available. 1/ Excluding debt service obligations against additional aid commitments after March 1982 which are likely to be nominal for interest payments on concessionary loans.  - 58 - 6.07 The second major requirement of foreign exchange is for debt service payments, both principal repayments and interest payments. These debt service payments have grown very rapidly in recent years and would amount to as high as 37 percent of merchandise exports and non-factor services, thereby putting serious strains on the country's foreign exchange resources. The Government may explore the possibility of rescheduling its debt repayment obligations through bilateral negotiations with the creditors. It seems difficult to envisage these negotiations at the Paris Club since only about 8 percent of the total external public debt (disbursed) is owed to members of the Paris Club. 6.08 Foreign Exchange Financing. The growth of merchandise exports will continue to be determined by developments in the livestock subsector and in the production of bananas. The projections made in Table 13 assume that the growth of livestock exports would be consistent with past trends. In case of bananas, the rehabilitation program will permit the reattainment of earlier (1973) peak export levels by the mid 1980s. However, it shoul]d be noted that somewhat weaker price prospect, both for live animals and bananas, would offset a part of the gain in export volumes. 6.09 The private transfers, which are essentially remittances of Somali emigrant workers, are projected to rise five-fold -- from $20 million in 1982 to $100 million by 1986. This is an optimistic projection which can be realized only if the suggested incentive policies for mobilizing these remittances are implemented (see para. 5.08). 6.10 In spite of the optimistic projections, the current account deficit during each year of the period remains at a very high level of around $300 million, which on average amounts to around 15 percent of the roughly estimated GDP. Data in Table 13 show that for 1982 and 1983, the existing commitments of external grants and loans (food aid, other commodity aid, project aid and balance of payments support) are virtually adequate to cover the entire current account deficit, even after allowing for amortization of outstanding loans and some net accumulation of foreign exchange reserves. However, for the period 1984 onwards, information on future donor plans for Somalia is rather sketchy. Based on information supplied by the Government, the projections are made on the assumption that official grants for food aid including aid for refugees) and project aid would continue at about the levels of 1982-83. However, available information indicated that inflows of commodity aid would dwindle to insignificance by the mid-1080s unless new commitments are made. Similarly, disbursements of medium-and long-term loans for projects would be substantially lower starting from 1984, unless new commitments are forthcoming. 6.11 With these tnknowns, a shortfall in capital inflows to finance the current account deficit would rise from $104 million in 1984 to $211 million in 1986. Additional aid commitments required to bridge this gap  - 59 - would range between $277 million in 1984 to $289 million in 1986.2/ Given the difficult international aid climate and the poor performance of the economy despite inflow of large volume of foreign aid in the 1970s, it may not be easy to fill the large resource gap shown in Table 13. However, if the Government agrees to carry out the major policy and institutional changes recommended in this report, in particular for rehabilitating and expanding the productive base of the economy with focus on exports and import replacement, the Government could make a good case for mobilizing additional resources. Perhaps, some additional commitments could be made during 1983 to meet a part of the disbursements required to fill the overall gap in 1984. A major constraint in absorbing such large amounts of aid disbursements in a relatively short period is the project implementation capacity of the Government. As emphasized in Chapter 5, significant improvements in this regard will be critical for absorption of aid disbursements noted above. Given the very high debt service burden of Somalia, the Government should try to finance this gap from the donors through outright grants and/or concessional loans. The rapid increase in the debt service and the constraint of foreign exchange availability underscore the need for the Government to refrain totally from external borrowing on hard terms. 6.12 Finally, it is important for the Government to explore the options for reallocating existing external assistance commitments for projects with low rates of return and more distant payoffs to projects of higher priority with quicker payoffs. A case in point is the donor commitment of funds for the Bardhere dam project, the economic and financial viability of which is currently under review (cf. para 5.17). It should be noted that in the projections in Table 13, we have included neither the import requirements nor the aid flows for this project. Prospects for Public Finance 6.13 Data limitations make it very difficult to make any reasonably robust projections of prospective Government revenues and current expenditures over the medium-term. Such a projection is, however, extremely important not only to envisage the Government's own financing of sorely needed recurrent expenditures in social and economic sectors but also to assess the prospects of Government savings for financing at least a part of the Public Investment Program (PIP). 6.14 Within the constraints of data deficiency in regard to the relationship of tax revenues and expenditures with other variables, a simple and rough projection is presented in Table 14. Detailed assumptions underlying these projections are noted below the table. 2/ These figures are based on the assumption that external financing of the overall gap would be in the form of commodity aid for 70 percent and project aid for the remaining 30 percent. It is further assumed that commodity aid commitments will be disbursed over a period of two years at the rate of 60 percent and 40 percent, respectively. Project aid is assumed to be disbursed over a five-year period at the rate of 20, 30, 30, 10 and 10 percent, respectively.  - 60 - 6.15 The projections for revenues are optimistic due to the assumption of substantive improvements in the efficiency of the tax collection administration. While no new taxes are assumed, the impact of livestock export tax has been taken into consideration. In estimating import duties, the close linkage between the balance of payments and the budget is recognized; between 1977 and 1980, revenues from import duties contributed an average of 40 percent of total revenues, while the ratio of revenue from import duties to total imports (excluding food imports) was 41 percent. In projecting revenues from import duties through 1986, the above linkage and ratio of revenues to total imports has been assumed. If for any reason there is a shortfall in the level of imports projected in Table 13, this will mean that the Government will not be able to have local currency generation sufficient even to use the existing project aid pipeline which in turn will adversely affect the growth of the economy. Projections of revenues from taxes on goods and services and from those on income and property are based on the assumption of a moderate growth of taxable output and income, as noted in Table 14.  - 61 - Table 14: PROJECTIONS OF GOVERNMENT REVENUES AND CURRENT EXPENDITURES 1982-1986 (In millions of current U.S. Dollars) REVENUES Taxes on International Trade 1982 1983 1984 1985 1986 Import duties'/ 146 154 164 177 185 Export duties_/ 13 16 18 19 21 Taxes on Goods and Services3/ 24 27 30 34 38 Taxes on Income and Property4/ 28 31 34 37 41 Other Taxes4! 20 22 24 26 29 Non-Tax Revenue5/ 36 39 43 47 52 Total 267 289 313 340 366 CURRENT EXPENDITURES 1982 1983 1984 1985 1986 General Public Services6/ 90 97 105 112 120 Other Public Services 7/ (including Defense) 105 114 124 135 147 Social Services 8/ 45 49 54 59 64 Economic Sector9/ 35 39 43 47 52 Total 275 299 326 353 383 CURRENT ACCOUNT BALANCE -8 -9 -13 -13 -17 Notes: All projections assume an annual inflation rate of 8 percent through 1986. 1/ Calculated as 41 percent of non-food imports as shown in Table 13. 2! 15% of the value of livestock exports noted in Table 13. 3! From 1982 onwards, an annual growth of 4% in real terms. 4! From 1982 base, an annual growth of 1 percent in real terms. 5/ No growth in 1983, from then on an annual growth of 2% in real terms. 6/ No growth in real terms. 7/ 1 percent annual growth in real terms. 8/ 1.5 percent annual growth in real terms. 9/ 2.5 percent annual growth in real terms.  - 62 - 6.16 The basis of projections for growth of current expenditures is given below Table 14. This table is very different in conception from Table 13. Projections in Table 14 do not assume any major policy changes, such as a reduction in defense and general service expenditures, or any new taxes. Data in Table 14 show that the current account budget will be in deficit throughout the period under review. This implies that Somalia will depend on foreign aid not only for financing its entire public investment program (including local cost) but also for meeting the gap in the current account. This situation is clearly untenable and has to be changed so that the current budget generates a surplus to meet at least a part of the local cost of the public investment program. 6.17 In order to achieve the above objective, the Government has to take some hard and unpopular decisions to mobilize additional revenues and at the same time to reduce some items of current expenditures. Additional revenue could be mobilized if consideration is given to (a) the elimination of exemptions (and/or reductions) from import tax; (b) the changeover of specific import and export duties to an ad valorem basis; and (c) the introduction of a general sales tax applicable to sales of goods (including imports) and services. As mentioned in para 3.09 the ratio of Government revenues to GDP declined from 18 percent in 1978 to 15 percent in 1981 and this provides some scope for mobilizing additional revenues. However, the scope for generating additional revenues in the short- to medium-term is rather limited. Therefore, the Government should give consideration to reducing the current expenditures, especially on "General Public Services" and "Other Public Services" which currently account for nearly three-fourths of total recurrent expenditures. The Government should also exercise stringent controls of Government expenditures and improve public accountability. The Outlook for the Public Investment Program 6.18 The projections in Table 14 indicate a small annual current account deficit in the Government budget during the medium-term period through 1986. This has Important implications for the feasible size of the Public Investment Program and its financing by the Government. Given the inadequacies of data on national income accounts, the available best estimates, however preliminary, indicate that in 1982 the gross domestic savings would be a mere 0.5 percent of GDP and that in subsequent years through 1986 it would at best creep up to 2.5 percent. Again, the endorsement by the Government of the policy to encourage private savings and investments, as suggested in Chapter 5, would provide little room for the Government to siphon off the small prospective domestic saving for financing the PIP. Furthermore, in the light of the recent experience of rampant domestic inflation and the subsequent adoption of the stabilization program, it is hardly conceivable that the PIP could be financed by recourse to the banking system. Under these circumstances, the size of the Public Investment Program (PIP) will essentially be determined by the resource gap which the international community would be willing to finance. The PIP should therefore be highly constrained and carefully prepared along the lines recommended in paras. 5.21 - 5.24, with primary focus on rehabilitation and consolidation of the productive sectors of the economy.  - 63 - 6.19 Clearly, the size of the total gross domestic investment cannot exceed the sum of gross domestic savings and the external resource balance. The latter is indicated in the optimistic projections given in Table 13. In Somalia's case, a part of the resource balance (that is, aid for refugee relief and rehabilitation) should be deducted from the overall resource balance to obtain the magnitude of external resources that would be available for domestic investment. The gross domestic savings (including private savings) need to be estimated and added to this resource balance to obtain the feasible level of total gross domestic investment. The share of public investment in total gross domestic investment will then indicate the size of the Public Investment Program.3/ 3/ According to data in Table 13, the projection for the resource balance (net of refugee aid) amounts (in current prices) to about $1,130 million, or roughly of the order of $900 million in 1982 prices. On the basis of some rough indications of the rate of domestic savings reflected in para 6.19, it seems that domestic savings for the period under review may not exceed $100 million (in 1982 prices). These back-of-the-envelope figures appear to indicate that the total gross doemstic investment for the period 1982-1986 may be of the order of about $1,000 billion (in 1982 prices).  _ 64 - Annex to Chapter 6 NOTES TO TABLE 13 General Assumptions The mission assumed that policies recommended in the economic report for increasing production (particularly in the agriculture sector) would be followed, with a positive impact on both exportables and import substitutes. Somalia-s imports in 1978-80 were unusually high (over 40% of GDP), but these did not have any impact on growth of the economy. The projections for imports assume a better use of scarce foreign exchange resources as recommended in the report. It is further assumed that: (a) all imported goods will reflect their true cost in the domestic market; and (b) substantial import taxes will be levied, in order to discourage import of non-essential and luxury items. Assumptions about growth of Export Volume (a) Live Animals - With the average of 1979-80 as base, an annual increase in volume of (in percent): Cattle 3.0 Goat & Sheep 2.5 Camel 1.5 (b) Bananas - With 1979 as base, an annual increase in volume of (in percent): 1982 15 1983 and 84 20 1984, 1985 and 86 15 (c) Hides and Skins - An annual growth in volume at the same rate as for live animals. (d) Other Exports - With 1979-80 as base, an annual growth rate of 5 percent for fish and fish products, and 3 percent for other non-petroleum exports. The volume oiE Heavy Fuel Oil exports is assumed to remain at the estimated 1982 level. Export Price Assumptions - Export prices are taken from data assembled by the World Bank Commodities Division. Up to 1982, the prices are actual while those for subsequent years are projections. - The prices of live animals and of meat and meat products area projected on the assumption that they follow the trend of beef prices in the world market.  - 65 - - In projecting the export price of Somali bananas it is assumed that they follow the trend of export prices of Central American bananas, although the latter fetch much higher prices. - For heavy fuel oil, trends in petroleum prices are used. - For hides and skins, fish and other exports, the price trend of general agricultural commodities is used. Assumptions about Growth of Import Volume (1) Food (a) Foodgrains Foodgrain consumption data - about 180 lb. per head/year - for 1979, based on production and imports are used as a norm. Given the dietary habits of the Somali population, especially the pastoralists, this amount of foodgrain intake plus consumption of animal products, edible oil and sugar provided an average daily calorie intake of 2,300 per person during 1977-79 (see "Food Outlook", prepared in the Ministry of Agriculture, Early Warning System Department, 1981). For 1982 the mission used the best available estimate of food imports. A population of 5.3 million in 1982 (excluding refugees) is assumed and the norm of 180 lb. per head/annum for consumption is used. In making projections for foodgrain consumption for 1983 onwards, we allow an increase of 4 percent (3 percent for population growth and 1 percent for income and other factors) in foodgrain consumption. In addition, 111,000 tonnes of foodgrains per year are assumed to be required for refugees whose number is taken at 700,000 for the period under consideration. This implies a per capita foodgrain consumption of 350 lbs. per annum. For projecting domestic food consumption, the average of 1979 and 1980 is taken as the base and foodgrain production is assumed to increase at 3 percent per year for maize and sorghum and 5 per- cent per year for rice. Total import requirements of foodgrains are residually determined. It is further assumed that the import composition of foodgrains will be kept at: maize (60 percent), wheat (30 percent), and rice (10 percent). Clearly the pro- portion of rice in total food imports will need to be reduced through appropriate pricing and fiscal policies. Prices -- We use data assembled in World Bank Commodity Price projections and assume freight (and insurance) cost per ton at: Maize $70 Rice $90 (b) Sugar and Edible Oil Sugar -- The gap between consumption and domestic production is assumed to be about 11,000 tons in 1982. This will be sub- stantially eliminated in 1983 and entirely eliminated as pro- duction in subsequent years, from Juba Sugar Project increases.  - 66 - Edible Oil - The level of imports will be kept at about 20,000 tonnes. This level is slightly higher than imports in 1978. An additional 10,000 tonnes per year has been allowed for refugees. Prices - We have used data from World Bank Commodity price projections for sugar and soyabean oil and assumed a freight of $100/ton. c) Other Food - Imports (e.g. dried milk, dates) are assumed to rise from $4 million in 1983 to $5 million in 1986). (2) For projections of Other Imports, data for 1982 are our best estimate. We assume the following growth rate in real terms for 1983 onwards. 1983 1984 1985 1986 Other Consumption Goods 0 0 0 0 Mineral Fuels 2.0 2.0 2.0 2.0 Intermediate Goods 3.0 3.0 3.0 3.0 Capital Goods 2.0 2.0 2.0 2.0 Prices -- Used from data assembled by World Bank Commodities Division. (3) Non-Factor Services (Net) Projections based on past trends as reflected in Balance of Payments accounts. (4) Factor Services (Net) Interest payment on MLT from World Bank Debt Reporting Services. Other Factor Services are negligible. (5) Private Transfers -- These are essentially remittances of emigrant workers. The figures are highly optimistic on the assumption that the Government will introduce significant, as recommended in the report, to mobilize the sizeable savings of the emigrant workers. (6) Official Grants Food Aid - From World Food Program, Mogadishu. Other Commodity Aid - Oil grant from Saudi Arabia for 1982 and 1983 and 90 percent of other commodity aid commitments on the basis of data supplied by the Somali authorities.  - 67 - Project Aid - 70 percent of the foreign grant commitments for projects. It is assumed that 30 percent of the total commitments are for technical assistance - which are excluded. (7) Disbursements, MLT Based on data available from the World Bank, Debt Reporting System. (8) Amortization MLT - As per World Bank Debt Reporting Services. (9) Capital, n.i.e., NET - Essentially IMF purchases under the Stand-by program for 1982-83 and balance of payments support from the Arab Monetary Fund. (10) Net Accumulation of Reserves. To allow for building up reserves to the level of about 8-10 weeks' value of imports.  - 68 - Statistical Annex Table of Contents Table No. Title Population and Employment 1.1 Population by Region and Occupation 1.2 Employment by Economic Activities, 1978 1.3 Employment by Occupational Groups, 1978 National Accounts 2.1 Gross Domestic Product by Industrial Origin, Current Factor Cost, 1972-1978. 2.2 Gross Domestic Product by Industrial Origin, at Constant 1970 Factor Cost, 1972-1978. Balance of Payments and Trade 3.1 Balance of Payments, in Somali Shillings, 1975-1981. 3.2 Balance of Payments, in U.S. Dollars, 1975-1]981. 3.3 Value of Exports by Major Commodities, 1974-1980. 3.4 Value of Exports by Major Commodities, in Percentages, 1974-1980. 3.5 Value of Exports by Major Commodities Based on Foreign Exchange Record, 1975-1980. 3.6 Value of Exports by Major Commodities Based on Foreign Exchange, in Percentages, 1975-1981. 3.7 Export by Country of Destination, 1974-1980. 3.8 Export by Couuntry of Destination, in Percentages, 1974-1980. 3.9 Livestock Exports, 1974-1980.  - 69 - 3.10 Livestock Exports to Saudi Arabia, 1974-1980. 3.11 Destination and Value of Banana Exports, 1974-1980. 3.12 Hides and Skins Exports, 1974-1980. 3.13 Main Food Imports by ENC, 1976-1980. 3.14 Imports by Commodities, 1974-1980. 3.15 Commodity Imports by Country of Origin, 1974-1980. 3.16 Commodity Imports by Country of Origin, in Percentages, 1974-1980. 3.17 Sources and Uses of Foreign Exchange Resources, 1977-80. External Debt 4.1 Loan Commitments by Creditor Source, 1977-1981. 4.2 Distribution of External Loans by Sectors, 1975-1981. 4.3 Structure and Terms of External Public Debt, 1977-1981. 4.4 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt (March 31, 1982). 4.5 External Public Debt Outstanding Including Undisbursed (December 31, 1981). Public Finance 5.1 Financial Operations of the Central Government, 1975-1981. 5.2 Central Government Revenue, 1975-1980. 5.3 Functional Classification of Central Government Ordinary Expenditure, 1975-1980. 5.4 Central Government Wage Bill, 1975-1980. 5.5 Functional Classification of Central Government Budgetary Development Expenditure, 1975-1980.  - 70 - 5.6 Five-Year Development Plan (FYDP) (1975-1978), Targets and Its Implementation. 5.7 Three-Year Development Plan (TYDP) (1979-1981), Targets and its Implementation. 5.8 Source of Financing of FYDP and First Year of TYDP. Money and Banking 6.1 Monetary Survey, 1975-1981. 6.2 Summary Accounts of the Central Bank of Somalia, 1975-1981. 6.3 Summary Accounts of the National Commercial Bank of Somalia, 1975-1981. 6.4 Summary Accounts of the Somali Development Bank, 1975-1980. 6.5 Loans and Advances by Economic Activity, 1973-1980. 6.6 Somali Development Bank - Loans by Sector, 1975-1981. Agriculture 7.1 Production of Agricultural Crops, 1971-1981. 7.2 Bananas - Area, Yields and Exports, 1970, 1973-1981. 7.3 Average Costs and Returns of Banana Growing 7.4 Production of Sugarcane and Sugar, 1970, 1974-1981. 7.5 Livestock Population by Region, 1975 Census. 7.6 Indicators of Profitability for Major Crops, 1973-81.  - 71 - Industry 8.1 Number of Industrial Establishments and Distribution of Gross Output and Value Added by Economic Activity, 1970 and 1975-1979. 8.2 Percentage Distribution of Industrial Establishments, Gross Output and Value Added by Economic Activity, 1970 and 1975-1979. 8.3 Selected Data on Public and Private Sector Manufacturing Industries Engaging Five or more Persons. Prices 9.1 Mogadishu Consumer price Index, 1970-1981. Education 10.1 Education by Level, 1980/81. 10.2 Primary and Secondary Schooling, 1970/71-1980/81. 10.3 Primary School Enrollment by Age Group, Sex and Grade, 1980/81.  Table I Is SOHALUs NOMADIC. SITTLED VWHw ADNf-AGRCKscuLTVML oLnN DC0.l Tabl 1 *1: S4AL1i U~ADIC* S!TL~VARMINO ANID 2OAZLTU PO7ULTIOU IT 1zc1oU. 1975 (Thousands) Total Nomadic Settled farting @on-Agricultuural No. S No. 2 ho . I No. 2 North-Weet 698 18.7 469 12.6 160 4.3 69 1.9 W. Calbeed 440 11.6 271 7.3 1 138 51 1.4 Togdhear 258 6.9 198 5.3 42 1.1 18 0.5 North-East 386 10.4 295 _7 9 64 1.7 27 0.7 Sanag 145 3.9 113 3.0 22 0.6 0.3 Bari 154 4.2 116 3.1 27 0.7 11 0.3 flugal 87 2.3 66 1.8 15 0.4 6 0.1 Central 397 10.7 289 7.8 76 2.0 32 0.8 Hudug 215 ..8 170 4.6 32i 0.8 13 0.3 Cslguduud 182 i.9 119 3.2 44 1.2 19 0.5 Shtbellt Iiveg le8 31.9 47S 12.6 233 6.3 480 12.9 Hliran 147 3.9 116 3.1 2*2 0.6 9 0.2 11iddle Shebelll 263 7.1 166 4.5 68 1.8 29 0.8 l.ower Shebelli 398 10.7 193 5.2 143 3.9 62 1.7 Mogadishu 380 10.2 - - - - 380 10.2 JuLa River 651 17.5 477 12.8 122 3.3 52 1.4 Cedo 212 5.7 181 4.8 22 0.6 -9 0.3 Zliddle Juba 216 5.8 141 3.8 52 1.4 23 0.6 Lower Juba 223 6.0 155 4.2 48 1.3 20 0.5 Inter-Riverine 402 10.8 179 4.8 156 4.2 67 1.8 BakQjol 102.7 79 2.1 135 0.4 60.2 Bay 302 8.1 100 2.7 141 3.8 61 1.6 7nTAL 3722 100.0 2184 58.7 811 21.8 727 19.5 Sources Hllstry of Planning. Three-Tear Plan. 1979-81 N..te: Ihe figures for population given in this table are rough and tentative. According to the Three-Year Plan (1979-1981), the number of people is not known precisely as the census was taken in 1975 at the height of the worst drought ever recorded. Kany people, especially nomads, were moving in search of food and water and accurate enumeration could not be obtained under such circumstances. Even at this stage, full details of the 1975 census data remain unpublished. Somali authorities now claim that there was under-enumerationi of 150,000 households, accounting for about 700,000 people, during the 1975 cenlsus.  - 73 - Table 1.2: SOMALIA. EMPLOYMENT BY ECONOMIC ACTIVITIES, 1978 1/ Private Public T o t a I Share Share Share No. (%) No. (%) No. (%) Agriculture, Livestock, and Fishing 81 0.1 10,780 14.6 10,861 8.4 Mining and Quarrying 424 0.8 173 0.2 597 0.5 Manufacturing 8,558 15.4 7,135 9.7 15,693 12.1 Utilities - - 2,429 3.3 2,429 1.9 Construction 646 1.2 3,683 5.0 4,329 3.3 Commerce, Restaurant and Hotels 35,011 63.0 5,873 8.0 40,884 31.6 Transportation and Communication 4,867 8.8 7,202 9.8 12,069 9.3 Finance, Insurance and Business Services 1,136 2.0 1,200 1.6 2,336 1.8 Public Administration, Community and Personal Services 4,823 8.7 35,228 47.8 40,051 31.0 TOTAL 55,546 100.0 73,703 100.0 129,249 100.0 1/ Excluding defense. Source: Ministry of Labor and Social Affairs, Manpower Dept., National Manpower Resources and Requirement Survey 1978-1983, Vol. 1, 1979.  - 74 - Table 1.3: SOMALIA: EMPLOYMENT BY OCCUPATIONAL GROUPS, 1978 1/ Private Public T o t a 1 Share Share Share No. (%) No. (%) No. (%) Professional Workers 45 0.1 2,296 3.1 2,341 1.8 Technical Workers 503 0.9 18,493 25.1 18,996 14.7 Administrative & Executive Workers 260 0.5 2,428 3.3 2,688 2.1 Clerical Workers 1,652 3.0 10,993 14.9 12,645 9.8 Sales Workers 26,598 47.9 1,034 1.4 27,632 21.4 Service Workers 9,728 17.5 8,715 11.8 18,443 14.3 Agric. & Fishing Workers 123 0.2 1,662 2.3 1,785 1.4 Skilled and Semi-Skilled Workers 13,822 24.9 17,031 23.1 30,853 23.9 Laborers 2,815 5.1 11,051 15.0 13,866 10.7 Total 55,546 100.0 73,703 100.0 129,249 100.0 1/ Excluding defense. Source: Ministry of Labor and Social Affairs, Manpower Dept., National Manpower Resources and Requirement Survey 1978-1983, Vol. 1, 1979.  - 75 - TABLE 2.1 SOMALIA: GROSS DOMESTIC FRODUCT BY INDUSTRIAL ORIGIN, CURRENT FACTOR COST, 1972-78 (MILLIONS OF SOMALI SHILLINGS) ----------------------------------------------------------------__-----------__----------------- ITEM 1972 1973 1974 1975 1976 1977 1978 AGRICULTURE SECTOR 1 1,267.3 1,196.6 949.4 1,618.5 2,225.9 2,943.8 3,448.4 CROF FRODUCTION 2 359.3 328.3 322.6 405.0 429.2 520.3 561.4 LIVESTOCK 3 730.8 680.3 424.0 990.5 1,530.2 2,129.8 2,583.2 FORESTRY 4 171.0 180.0 190.0 205.0 225.0 253.0 287.0 FISHING 5 6.2 8.0 12.8 18.0 41.5 40.7 16.8 OTHER COMMODITY SECTORS 6 378.1 369.6 503.6 485.2 621.3 813.9 706.2 MINING AND QUARRYING 7 26.0 25.0 30.0 35.0 36.0 40.0 28.0 MANUFACTURING 8 214.0 210.5 199.7 226.2 334.6 439.0 433.2 SMALL SCALE INDUSTRY 1/ 9 87.0 86.0 83.0 88.0 125.0 158.0 165.0 ELECTRICITY S WATER 10 10.1 14.1 16.9 20.0 31.7 32.9 39.0 CONSTRUCTION 11 128.0 120.0 257.0 204.0 219.0 302.0 206.0 DISTRIBUTION SERVICES 12 276.3 306.5 344-5 450.1 543.0 656.3 743.9 TRANSPORT g COMMUNICATION 13 138.6 155.2 168.6 210.1 258.0 316.3 365.3 WHOLESALE& RET. TRADE, HOTEL 14 137.7 151.3 175.9 240.0 285.0 340-0 378.6 OTHER SERVICES 17 337.3 410.3 494-5 603.7 705.0 828.9 1,227.8 BANKING, INSUR., & REAL ESTA 18 102.3 125.6 160.3 228.2 268.0 311.5 450.2 BANKING S INSURANCE 19 26.2 29.6 61.3 74.7 84.3 91.6 141.6 GOVERNMENT SREVICES 21 172.0 209.7 248.6 268.0 308.0 368.8 608.0 OTHER 20 63.0 75.0 85.6 107.5 129.0 148.6 169.6 GDP AT FACTOR COST 23 2,259.0 2,283.0 2,292.0 3,157.5 4,095.2 5,242.9 6,126.3 INDIRECT TAXES 24 329.4 382.2 474.9 522.8 536.1 678.6 1,010.0 GDP AT MARKET FRICES 25 2,588.4 2,665.2 2,766.9 3,680.3 4,631.3 5,921.5 7,136.3 1/ TAKEN FROM NATIONAL ACCOUNTS ESTIMATES PREPARED BY MNP, CENTRAL PLANNING DEPARTMENT, DEC. 1979. SOURCE: MINISTRY OF NATIONAL FLANNING , THE FIVE YEAR DEV. PLAN ,1982-86  - 76 - TABLE 2.2 SOMALIA: GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN AT CONSTANT 1970 FACTOR COST, 1972-78 (MILLIONS OF SOMALI SHILLINGS) ITEM 1972 1973 1974 1975 1976 1977 1978 AGRICULTURE SECTOR 31 1,180.1 970.5 725.6 928.7 1,107.6 1,281.3 1,304.7 CROP PRODUCTION 32 294.3 221.1 191.2 233.8 241.1 241.3 246.9 LIVESTOCK 33 713.1 569.7 345.0 495.7 648.7 817.5 836.6 FORESTRY 34 167.0 173.0 180.0 188.0 197.0 205.0 215.0 FISHING 35 5.7 6.7 9.4 11.2 20.8 17.5 6.2 OTHER COMMODITY SECTORES 36 364.2 327.3 296.4 282.3 326.8 398.1 321.9 MINING AND QUARRYING 37 27.0 24.3 24.7 24.1 21.8 21.8 13.7 MANUFACTURING 38 222.0 205.0 154.5 156.0 202.8 240.0 211.6 SMALL SCALE INDUSTRY 1/ 39 90.2 83.7 64.3 60.7 75.7 86.3 80.4 ELECTRICITY S WATER 40 9.5 11.3 12.3 13.8 21.6 22.2 26.6 CONSTRUCTION 41 105.7 86.7 104.9 88.4 80.6 114.1 70.0 DlISTRIBUTION SERVICES 42 276.1 278.7 217.6 270.7 283.9 294.8 328.9 TRANSFORT & COMMUNICATION 43 133.3 131.4 72.8 105.2 111.6 109.8 143.9 WHOLESALE & RET. TRADE, HOTE 44 142.8 147.3 144.8 165.5 172.3 185.0 185.0 OTHER SERVICES 47 349.7 399.4 407.2 416.2 426.2 453.3 599.8 BANKING, INSUR. & REAL ESTAT 48 106.1 122.3 132.0 157.3 162,0 170.3 219.9 GOVERNMENT SERVICES 51 178.3 204.1 204.7 184.8 186.2 201.7 297.0 OTHER 50 65.3 73.0 70.5 74.1 78.0 81.3 82.9 GriP AT FACTOR COST 53 2,170.1 1,975.9 1,646.8 1,897.9 2,144.5 2,427.5 2,555.3 INDIRECT TAXES 54 341.6 372.1 391.0 360.5 324.1 371.1 493.5 GriP AT MARKET PRICES 55 2,511.7 2,348.0 2,037.8 2,258.4 2,468.6 2,798.6 3,048.8 1/TAKEN FROM NATIONAL ACCOUNTS ESTIMATES PREPARED BY MNP, CENTRAL PLANNING DEF'ARTMENT, DEC. 1979. SOURCE: MINISTRY OF NATIONAL FLANNING, THE FIVE YEAR DEV. PLAN ,1982-86. (DRArT) FAGE 23.  - 77 - Table 3.1: SOMALIA: BALANCE OF PAYMENTS (Millions of So. Shillings) Item 1975 1976 1977 1978 1979 1980 1981 lt Exports (f.o.b.) 558.0 509.8 448.9 689.1 667.4 839.3 1,127.8 Livestock - 301.5 299.5 570.4 474.1 639.5 1,001.9 Banana - 88.1 53.0 59.0 73.2 51.2 63.5 Others - 120.2 96.4 59.7 120.1 148.6 62.4 Imports (c.i.f.) -1,021.0 -1,108.5 -1,296.5 -1,731.3 -2,480.8 -2,905.4 -2,875.7 Foreign Exchange - -1,089.0 -1,228.1 -729.3 -1,818.1 -1,739.5 -1,198.7 Franco Valuta - -19.5 -68.4 -477.4 -217.4 -345.3 -503.6 Grants in kind - - - -132.4 -95.0 -434.9 -703.3 Loans in kind - - - -393.4 -350.3 -385.7 -470.1 Trade Balance -463.0 -598.7 -847.6 -1,042.2 -1,813.4 -2,066.1 -1,747.9 Non-factor Services (Net) -182.0 -103.0 -53.9 -52.2 -88.8 -43.9 -34.0 Transportation & Ins. -18.0 -20.0 -8.5 -4.0 11.6 -33.1 7.0 Travel -32.0 -40.0 -15.3 19.5 -86.0 -43.6 -45.8 Government, N.E.I. -11.0 52.0 2.7 5.3 29.0 49.0 11.3 Other -121.0 -95.0 -32.8 -73.0 -43.4 -16.2 -6.5 Resource Balance -645.0 -701.7 -901.5 -1,094.4 -1,902.2 -2,110.0 -1,781.9 Factor Income (Net) 2.0 8.0 13.5 22.2 15.6 -5.5 -50.9 Private Transfers (Net)2/ 12.0 26.4 82.3 491.4 226.0 360.4 337.3 Current Balance -631.0 -667.3 -805.7 -580.8 -1660.6 -1755.1 -695.5 M&LT Capital Inflow Direct Investment 42.2 13.8 49.1 1.9 - - - Official Grant Aid 631.0 250.0 667.0 175.0 365.6 897.8 800.0 Public M&LT Loans (DRS) 371.4 340.0 554.6 768.6 692.5 868.7 1610.7 Disbursement 396.0 358.2 577.9 798.2 718.9 924.7 1747.6 Repayment -24.5 -18.3 23.3 29.6 26.4 56.0 136.9 Other M&LT (Net) - 85.4 -151.6 -272.7 -165.4 -321.4 1176.5 Credit from- IMF (Net) - - - 1.9 - 26.4 373.9 Disbursement - - - - - 26.4 - Repayment - - - - - - Short-term Capital (Net) -38.4 1.8 49.0 - 24.4 -0.1 - Capital Inflows (N.E.I.) - - - - - - -1.9 Errors & Omissions 3/ -59.0 -9.2 -73.8 42.5 123.3 136.7 - Change in Net Reserves (- -INC) 316.2 -14.5 -288.6 -134.5 620.2 147.0 266.8 Note: Data for both exports and imports are underscored. I/ Preliminary estimates. 2/ Includes counterpart to franco valuta imports. 3/ Includes counterparts to valuation adjustments. Source: Data provided by the Central Bank of Somalia, IMF, and staff estimate.  - 78 - Table 3.2: SOMALIA: BALANCE OF PAYMENTS (Millions of Us$)'/ Item 1975 1976 1977 1J78 1979 1980 1981 2/ Exports (f.o.b.) 88.6 81.1 71.3 109.5 106.0 133.3 111.9 Livestock - 47.9 47.6 90.6 75.4 101.6 97.7 Banana 14.0 8.4 9.4 11.6 8.1 6.0 Others - 19.1 15.3 9.5 19.1 23.6 8.2 Imports (c.i.f.) -162.2 -176.1 -206.0 -275.2 -394.1 -461.5 -323.3 Foreign Exchange - -173.0 -195.1 -115.9 -288.8 -276.3 -137.8 Franco Valuta - -3.1 -10.8 -75.8 -34.5 -54.9 -60.7 Grants in kind - - - -21.0 -15.1 -69.1 -74.8 Loans in kind - - - -62.5 -55.7 -61.3 -50.0 Trade Balance -73.6 -95.0 -134.7 -165.7 -288.1 -328.2 -2il.4 Non-factor Services (Net) -28.9 -16.4 -8.6 -8.3 -14.2 -7.0 -3.7 Transportation & Ins. -2.9 -3.0 -1.4 -0.6 1.8 -5.3 0.7 Travel -5.1 -6.4 -2.4 3.1 -13.7 -6.9 -4.9 Government, N.E.I. -1.7 8.2 0.4 0.8 4.6 7.8 1.2 Other -19.2 -15.2 -5.2 -11.6 -6.9 -2.6 -0.7 Resource Balance -102.5 -111.4 -143.3 -174.0 -302.3 -135.2 -215.1 Factor Income (Net) 0.3 1.2 2.1 3.5 2.5 -0.9 -4.5 Private Transfers (Net)3/ 1.9 4.2 13.1 78.1 35.9 57.3 32.2 Current Balance -100.3 -106.0 -128.1 -92.4 -263.9 -278.8 -187.4 M&LT Capital Inflow Direct Investment 6.7 2.2 7.8 0.3 - - - Official Grant Aid 100.2 39.7 105.9 27.8 58.1 142.6 64.4 Public M&LT Loans (DRS) 59.0 54.0 88.1 122.1 110.0 138.0 189.5 Disbursement 62.9 56.9 91.8 126.8 114.2 146.9 205.6 Repayment -3.9 -2.9 -3.7 -4.7 -4.2 -8.9 -16.1 Other M&LT (Net) - 13.5 -24.1 -43.3 -26.3 -51.0 -138.7 Credit from IMF (Net) - - - - - 4.2 34.1 Disbursement - - - - - 4.2 34.1 Repayment Short-term Capital (Net) -6.1 0.3 7.8 - 3.9 - Capital Inflows (N.E.I.) - - - - - - - Errors & Omissions 4/ -9.3 1.3 -11.5 6.9 19.6 21.6 16.6 Change in Net Reserves (- -INC) -50.2 -2.4 -45.9 -21.4 98.6 23.4 21.5 Memo Items: Gross Foreign Reserves 68.4 84.9 120.0 126.3 43.8 14.6 30.7 Months of foreign exchange and Franco valuta imp. 5.1 5.8 7.0 7.9 1.6 0.5 1.9 Note: Data.for both exports and imports are underscored. 1/ Converted at the exchange rate of So.Sh. 6.295 - IS$1, except for 1981. For 1981, data converted at So.Sh. 6.295 - US$1 for transactions in the first half of the year and So.Sh. 12.59 - US$1 for transactions in the second half of the year; except for essential imports which amounted to US$ 18.3 million, where So.Sh. 6.295 - US$1 was used. 2/ Preliminary estimates. 3/ Includes counterpart to franco valuta imports. 4/ Includes counterparts to valuation adjustments. Source: Data provided by the Central Bank of Somalia, IMF, and staff estimate.  TABLE 3.3 SOMALIA: VALUE OF EXPORTS BY MAJOR COMMODITIES (MILLIONS OF SOMALI SHILLINGS) ITEM 1974 1975 1976 1977 1978 1979 1980 BANANAS 1 79.8 64.3 178.7 54.6 54.1 54.0 68.8 LIVE ANIMALS 2 222.4 382.0 281.2 279.5 588.7 555.2 639.5 MEAT ANDi MEAT FRODUCTS 3 35.8 44.1 43.0 13.3 0.3 5.9 10.4 HIDES ANED SKINS 4 14.1 26.3 51.0 9.5 12.0 53.1 41.8 FISH ANDI FISH PRODUCTS 5 15.2 11.6 15.6 9.4 2.6 3.7 2.8 OTHER 1/ 6 23.3 29.2 26,0 30.2 13.3 32.0 71.6 s TOTAL 7 390.6 557.5 595.5 396.5 671.0 703.9 834.9 1/ DATA FOR 1980 INCLUDES SO. SH. 51.0 MILLION OF FUEL OIL. NOTE 1/ t EXFORT VALUES AS ASSESSED BY CUSTOMS DO NOT ALWAYS REFLECT CURRENT FRICES; RATHER THEY SERVE AS BENCHMARK VALUES FOR FPlJRF'OSES OF LEVYING EXFPORT TAX ANDl STATISTICAL AND SERVICE DUTY. NOTE 21/:' EXF'ORT VALUES AS ASSESSED EBY CUSTOMS DIIFFER FROM EXF'ORT RECEIPTS AS REFPORTED BY THE CENTRAL. BANK DUE TO DIFFERENCES IN COVERAGE, TIMING, AND VALUATION. SOURCE:MINISTRY OF FLANNING, CENTRAL STATISTICAL DEPARTMENT, FOREIGN TRADE RETURNS.  TABLE 3.4 SOMALIA: VALUE OF EXPORTS BY MAJOR COMMODITIES (PERCENTAGES) ITEM 1974 1975 1976 1977 1978 1979 1980 BANANAS 1 20.4 11.5 30.0 13.8 81 7.7 8.2 LIVE ANIMALS 2 56.9 68.5 47.2 70.5 87.7 78.9 76.6 MEAT AND MEAT PRODUCTS 3 9.2 7.9 7.2 3.4 0.0 0.8 1.2 HIDES AND SKINS 4 3.6 4.7 8.6 2.4 1.8 7.5 5.0 X FISH AND FISH PRODUCTS 5 3.9 2.1 2.6 2.4 0.4 0.5 0.3