Navigating Fiscal Reform in Somalia: 2025 Progress Under Pressure and Promise
Issue 8
Somalia is undertaking a deliberate and technically ambitious effort to rebuild its fiscal architecture. The goal is clear but formidable: to finance essential services through domestic revenues by 2027, maintain fiscal deficits below 3.5% of GDP, and gradually reduce reliance on external grants, which currently fund well over 60% of the national budget. This reform journey is unfolding in a context shaped by climate shocks, security transitions, and political fragility. Yet, despite these pressures, the progress is tangible. New revenue laws are taking shape, digital public financial management systems are operational, payroll reform is advancing, and governance in the petroleum sector is gaining traction.
Revenue mobilization is one of the most visible areas of reform. Customs modernization is underway, with SOMCAS being rolled out at Mogadishu port and airport. The enactment of a new Income Tax Law marks a significant step toward broadening the tax base. Non-tax revenue collection is being centralized through a digital portal, signalling a shift from fragmented, ad hoc practices to a more transparent and rules-based system. These reforms are designed to reduce leakage, improve visibility, and create a predictable fiscal environment. However, the numbers reveal the scale of the challenge ahead. Domestic revenue remains around 3.5% of GDP, and tax revenue sits at approximately 2.3%, among the lowest in sub-Saharan Africa, where the regional average is closer to 15% (Somalia Budget Framework Paper).
Somalia’s public financial management is also undergoing a digital transformation. Digital signatures have been integrated into the Somali Financial Management Information System (SFMIS), invoice tracking has expanded, and payroll integration has been completed. The payroll system now covers over 90% of civil servants, helping to eliminate ghost workers and ensure that budgeted funds reach their intended recipient. These changes are enhancing transparency, reducing discretionary spending, and creating auditable trails for public expenditure. Yet digitalization brings its own set of challenges. Interoperability between systems, data quality, and user adoption are critical hurdles. Pay and grade reform, though approved in principle, remains politically sensitive and must be carefully sequenced to avoid disruption to morale and recruitment.
Debt management has seen cautious but meaningful progress. Somalia published its first Annual Debt Management Report and is developing a Medium-Term Debt Strategy. Financing gaps for 2025–2026 are being covered by concessional support. Debt sustainability is currently assessed as moderate risk, reflecting prudent fiscal stewardship in a volatile environment. Somalia’s successful completion of the HIPC Initiative in December 2023 resulted in over $4.5 billion in debt relief, reducing external debt from 64% of GDP in 2018 to less than 6% by the end of 2023. However, dependence on concessional financing must gradually give way to stronger domestic revenue capacity. Ensuring that debt-financed investments translate into productivity gains will require a transparent, stress-tested risk framework and robust monitoring mechanisms.
External pressures continue to shape the reform landscape. Climate shocks, particularly droughts and floods, threaten agricultural livelihoods and social welfare. Security transitions, including the withdrawal of ATMIS forces, and upcoming elections introduce uncertainty about reform continuity. Institutional capacity constraints further complicate the timely implementation of reform benchmarks. These pressures mean that Somalia’s reforms are unfolding in a high-stakes environment, where external shocks can quickly erode tax bases, disrupt service delivery, and derail reform timelines. Political dynamics can influence reform momentum, funding commitments, and the consistency of policy across administrations.
Despite these challenges, the outlook is cautiously optimistic. Growth is projected to recover from a 2025 dip, with mid-term estimates exceeding 4% annually (Somalia Budget Framework Paper). Governance gains, particularly in transparency, anti-corruption, and petroleum oversight, are notable. Regional integration opportunities, such as potential accession to the East African Community (EAC), offer promise but require careful alignment of fiscal and trade policies.
To sustain momentum, Somalia must strengthen institutional capacity through targeted training, performance management, and accountability mechanisms. Revenue modernization must continue with phased rollouts and practical transition support. The Medium-Term Debt Strategy must be finalized and published, with explicit contingency planning to manage risks. Climate and security risk scenarios must be integrated into macro-fiscal planning to build resilience. Governance reforms must deepen, with independent oversight, public reporting, and credible anti-corruption measures.
In a nutshell:
Somalia’s fiscal reform program is navigating a high-stakes landscape. The progress achieved - new revenue laws, digital PFM systems, payroll reform, and petroleum governance - reflects a credible commitment to sustainable development financing. The path ahead is demanding, but with disciplined execution and sustained political will, Somalia can move from aid dependence toward a resilient, inclusive fiscal future, underpinned by stronger institutions, better public service delivery, and credible debt and revenue management that can weather climate shocks, security transitions, and political tests.