Aid, Diaspora, and Debt: Unpacking Somalia’s External Sector Dynamics

Issue 5

Somalia’s balance of payments (BoP) over the past seven years tells a compelling story of a fragile, aid-dependent economy navigating persistent external pressures. The data reveals deep structural imbalances, a heavy reliance on remittances and grants, and limited progress in attracting investment or diversifying exports. While debt relief has improved fiscal space, the external sector remains vulnerable to shocks and institutional weaknesses.

1. Current account: Always in the red

Somalia’s current account has remained firmly negative, peaking at a deficit of over $3.8 billion in 2021 before narrowing to $1.6 billion in 2024. As a share of GDP, the deficit widened from -8% in 2022 to -14% in 2024, reflecting growing import dependence and stagnant export performance. This trend aligns with both the absorption approach and the Twin Deficits Hypothesis, where external imbalances mirror fiscal ones, driven by the absence of domestic savings and high consumption.

2. Trade and services: Structural weaknesses

The trade deficit expanded from $2.1 billion in 2018 to $5.7 billion in 2024, with imports (especially food, fuel, and capital goods) far outpacing modest export growth. The goods deficit rose from -38% to -49% of GDP, while the services deficit nearly doubled from -13% to -23%. Somalia’s dependence on foreign logistics, telecoms, and technical services underscores its vulnerability to external shocks and its non-existent domestic capacity to substitute imports.

3. Remittances: The unsung hero

Remittances have been the backbone of Somalia’s external stability. Secondary income, largely from the diaspora, averaged over $4 billion annually, peaking at $6.5 billion in 2024, equivalent to 56% of GDP. These inflows act as quasi-fiscal transfers, financing household consumption, education, and health in the absence of a formal fiscal redistribution mechanism.

4. Investment? More like disinvestment

Foreign Direct Investment (FDI) has been consistently negative since 2020, with $718 million in net outflows in 2024. This signals capital flight, profit repatriation, and investor uncertainty - often linked to institutional ambiguity, unclear revenue assignments (e.g., ports, telecoms), and regulatory fragmentation. While capital account inflows rose from 11% to 16% of GDP, driven by grants and debt relief, the lack of complementary FDI or export growth means these inflows risk being consumed rather than invested.

5. External debt: Down, but not out

Somalia’s external public debt fell sharply from $5.2 billion in 2018 to $1.5 billion in 2024, or from 44% to 13% of GDP, thanks to HIPC-related relief (in terms of Net Present Value, it is around 6% of GDP). However, this hasn’t yet translated into productive investment or export growth. Without structural reforms, Somalia risks falling into a low-debt, low-capacity trap, where debt relief has reduced liabilities, but the government still lacks the fiscal space to finance even basic operations, let alone drive transformation.

To strengthen Somalia’s external sector, the focus must be on fixing the fundamentals – improving trade infrastructure, reducing logistics costs, and diversifying exports. Building resilience through reserve accumulation and fiscal discipline is essential, even with limited fiscal space. Clarifying fiscal rules through a coherent federal framework can help restore investor confidence. And in a context of declining aid, remittances must be leveraged more strategically, not just to support consumption, but to fuel productive investment and long-term development.