Where Does All the Money Go? Somalia’s Recurrent Spending Dilemma

Issue 3

Last week on Substack, we unpacked Somalia’s federal fiscal journey from 2018 to 2024 – a story shaped by heavy donor reliance and a domestic revenue system that’s still finding its footing.

This week, we’re shifting gears to look at something just as critical: Somalia’s recurrent spending problem. But this isn’t just about numbers on a spreadsheet, it’s about what those numbers say about the state’s relationship with its people. When spending is unsustainable, it chips away at public trust, limits the government’s ability to deliver real change, and holds back progress on peace and development.

In the sections below, I break down the key challenges, draw lessons from other countries, and share some practical ideas for how Somalia can start turning things around.

What’s Really Going on with Somalia’s Public Finances?

Fig. 1 – Fiscal Performance Trend (Data from MoF)

Let’s start with the big picture. As you can see in the top-left corner of the figure above, Somalia has been leaning heavily on external grants - in some years, they’ve made up 50–60% of total revenue. That’s mostly because the country’s domestic revenue base is still very weak. Most of the taxes come from international trade, while income and business taxes barely register. This tells us a few things: the tax base is narrow, enforcement is weak, and a huge chunk of the economy operates informally.

But this week, we’re zooming in on a different issue: Somalia’s high and rigid recurrent spending. Right now, more than 60% of government spending goes to wages and operational costs (see figure on the top right-hand side). That leaves very little room for the kinds of investments that actually move the needle – like infrastructure, education, and health. For example, capital expenditure accounted for just 3.2% of the total budget in 2024.

Two trends are worth highlighting (see bottom left figure). First, the fiscal surpluses we saw in 2023–24 weren’t the result of reforms – they were driven by a temporary bump in aid after the delayed elections. So, not exactly a sign of structural progress. Second, social benefits shot up after 2020 (see expenditure figure), but again, this was mostly thanks to donors – not something built into a sustainable fiscal plan.

And then there’s the issue of fiscal federalism – or rather, the lack of it. Beyond the Baidoa agreement (which still hasn’t been formalised), there’s no clear system for how money is shared between the federal government and the states. That’s a big gap.

So why does all this matter? Because high recurrent spending crowds out development. It eats up the budget, leaving little space for the things people actually need. It also makes the system less flexible – when most of your spending is locked into salaries, it’s hard to respond to shocks. Over time, this kind of setup undermines fiscal sustainability, especially when deficits grow, and aid dependency deepens.

But maybe most importantly, it damages the social contract. When people see big public spending but still experience zero services, trust in government erodes and so does the willingness to pay taxes.

Now, Somalia isn’t alone in this. South Sudan faces similar issues: high aid dependency, a weak tax base, and a fragmented fiscal setup. Haiti is another example, with chronic underinvestment in capital, high recurrent costs, and low public trust. But there are also more hopeful stories. Liberia, for instance, managed to gradually shift from aid to domestic revenue after its conflict, helped by structured fiscal compacts that gave the process some direction.

Where do we go from here?

Let’s start with the basics: Somalia needs to boost its domestic revenue, and not just by taxing more but by taxing smarter. That means focusing on progressive taxation to build legitimacy, while also making it easier and fairer for people to comply (trade taxes as implemented in Somalia are regressive!). Formalising more of the economy, going digital, and fixing governance issues around tax collection and public financial management are all part of that puzzle.

But raising revenue is only half the story. How the money is spent matters just as much. Right now, too much of the budget goes to wages and running costs. That needs to change. Salaries should be tied to performance and fiscal space. And yes, it’s long overdue to invest more in infrastructure, education, and health – the kinds of things that actually improve lives and build trust in government.

Then there’s the big elephant in the room: fiscal federalism. Without a proper system for how money flows between the federal and state levels, progress will remain patchy. Somalia urgently needs a rules-based system for intergovernmental transfers, and it needs to start building fiscal capacity at the subnational level, which is currently almost non-existent. Transparency is also a major issue: people need to see where the money goes. Somalia’s ranking in Transparency International says it all.

Another missing piece is a robust Medium-Term Fiscal Framework (MTFF) - a tool that helps anchor spending and revenue decisions in a realistic, long-term plan. I’ve been calling for this for years, and it’s still not in place in real sense (at least now, there is a new medium-term revenue roadmap for 2024-27 - more on this next week!). Finally, donor funding needs to be integrated into a single, unified budget process. Right now, it’s too fragmented to be effective.

While the challenges are real, they also present an opportunity. Somalia has a chance to reshape its fiscal future in a way that builds trust, strengthens institutions, and delivers real benefits to its people. With the right reforms and leadership, meaningful progress is within reach.

Please tune in next week, where I’ll take a closer look at what a solid Medium-Term Fiscal Framework could actually look like for Somalia - and why it’s such a crucial missing piece. I’ll also unpack some of the limitations of the current IMF programme as it relates to the fiscal landscape. While it has played a pivotal role in steering fiscal reforms, there are limits to what it can achieve given the fragility and political economy of the country.

Ultimately, with the right adjustments, there’s a real opportunity to chart a more sustainable and inclusive fiscal path forward.