Possible COVID19-induced economic and food security crisis in Somalia: Preliminary analysis and recommendations

Bashir M. Hussein, Ph.D. Senior Advisor at the Ministry of Environment Agriculture and Climate Change, Puntland State of Somalia. Shakiib.sheikh@gmail.com

1. The global context

The novel coronavirus pandemic known also as COVID-19, a serious, in theory low-probability highimpact,

Biomedical threat has caught the entire world in a complete surprise.

Starting from China, which is home to close to quarter of the humanity and one of the major world factories that export to all over the world, the disease has been spreading very rapidly globally in the first quarter of the 2020. This has entailed, among other things, in total or partial closure of the major economic activities around the world. In a desperate attempt to control the disease, factories and other economic activities have been closed down, work force asked to stay at home and financial markets have started panicking. Most experts agree that there will be soon a global economic recession. In fact, save few sectors that might expand further due to increased demand of their products and services (e.g. health sector and some technology niches that are helping them mandatory social distancing and remotely working teams), most companies are either already affected or will be hit by the ongoing crisis very soon. For instance, in India, another global hub of both over one billion people and major economic and technology powerhouse, over 80% of the companies are already negatively impacted by the COVID-19 global pandemic and have already seen their cashflow dwindling . This example shows how the economies of countries that have not been affected seriously, at least at the early stage of the pandemic, are and will be suffering.

 Like in the last global financial crisis of 2007-8, the financial sector seems to be already at the centre of the storm. The financial panic which has started globally in the week of the March 8 , could not be stopped by cutting the interest rate by major Central Banks like the FED and European Central Bank. Managing cashflow and liquidity shortage is a monumental challenge at the moment all over the world despite OECD countries’ governments bumping massive amount of economic and fiscal support for their hard-hit economies. Lack of consumer confidence and search for financial safety are among key factors driving the increasing financial panic.  

In this context, as key global supply chains are either seriously disrupted or completely shut down by the consequence of the COVID-19 pandemic, the supply chains of both the remittance money towards Somalia and vital imports, including food and other essential goods, are feared to been already stressed and might soon to be seriously jeopardized.

2. The impact of the COVID-19 on food security in Somalia

Conflict-affected, highly-indebted, import-overdependent, fragile and highly vulnerable economies

like is the case in Somalia are expected to be hit hardest with a serious impact. Somalia is known to have been already suffering from a chronic food insecurity exacerbated by  decades of violent conflict, forced displacement and the effects of the ongoing climate change. According to the UN OCHA, which has cited the post-Dayr food security assessment undertaken by the FSNAU, as of February 2020, just before the full blown global COVID-19 crisis, more than 4.1  million Somalis were food insecure  including over 2.1 million Internally Displaced Persons (IDPs) whose already precarious livelihoods are further threatened by the consequences of the COVID-19.  In addition, Somalia is characterized by some unique features that make the country’s economy and

its population highly vulnerable to the global economic and financial shock waves. Particularly,

several intertwined factors make Somalia extremely vulnerable, namely:

1. Firstly, following four decades of civil strife, state collapse, recurrent famines and severe droughts, Somalia has been over-dependent on massive imports to meet its basic necessities such as food, medicines, fuel and other merchandise. According to the World Bank, by 2015 the import of food stuffs in Somalia has increased eighteen folds since 1980s . The driving factors of the massive increase of food imports has to do with such factors as a) rapidly growing population, b) dilapidated agricultural production infrastructure following the long-lasting conflict and lack of new investments and/orm evenm maintenance;
2. Secondly, thanks to the global Somali diaspora, which has been sending back home around two billion USD per annum, the above-mentioned massive imports have been and continue to be financed with remittance money;
3.  Third, both the remittance from Somalis living abroad and the food (and other essential goods’) imports are already or will be very soon disrupted by the ongoing COVID-19 crisis;
4.  Fourth, if the pandemic persists, the international (humanitarian) aid, on which Somalia has been so dependent over the last few decades, especially to fund basic public services and emergency response, will most likely be negatively affected by the COVID-19 pandemic as the expat staff who run the aid industry head back to their hard-hit home countries. In addition, the generous international donors, whose economies are now at the brink of collapsing due to the COVID-19, will most likely prioritize their own domestic emergencies and funding gaps;
5.  Fifth, Somalia’s other major source of significant hard currency source is represented by the meagre Somali export, mainly the agricultural export dominated historically by the livestock export whose seasonal peak coincides with the Muslim pilgrimage (Hajj). This vital economic subsector is also highly threatened this year due to the coronavirus pandemic as the major Muslim holy sites of Mecca and Madina are at the moment closed while it is very difficult to predict how the situation will evolve. As matter of fact, however, under normal circumstances, with its typically multi-stage and multi-agent long supply chain, the bulk of the Somali export livestock trade destined to the Middle East starts throughout the Horn of Africa several months ahead of the Hajj. With the closure of the Muslim holy sites of Mecca and Medina following the Coronavirus pandemic at a time when the seasonal peak is of the Somali livestock export is just around the corner, the prospect average performance of this sector is quite poor this year;   Finally, following the absence of effective governmental institutions for over three decades, including the Central Bank, the Somali economy is mainly dollar-based which fact increases the country’s overdependency on external economic and financial factors that are beyond the control of Somalis and their institutions. As the American currency has reappreciated sharply against the other major world currencies including euro and British sterling, the concurrent factors of dependency on imported food and highly depreciated Somali Shilling (used mainly by the poorest social sectors), which will most likely result in hyper-inflation, will inevitably impact negatively the food security of Somalis, particularly the vulnerable poor.

Based on the foregoing analysis of likely scenarios, it is obvious that all key dimensions of the food ssecurity in Somalia will be affected including a) availability of food (e.g. production, processing, distribution), b) accessibility (e.g. affordability), c) utilization (e.g. possible negative health outcomes), and d) stability over time   On top of all the forgoing factors, the man-made and long-running disaster, that is conflict, continues to affect Somalis, their livelihoods and the overall human development prospect

3. Constrained financial sector in the context of the COVID-19 worsens food insecurity

Following the collapse of the central government in Somalia in 1990, Somali diaspora, businesses  and consumers alike have been relying heavily on the informal Somali Money Transfer Companies MTCs) known also as Hawalas. However, with the advent of the war on terror and the global efforts on combat financing terrorism (CFT), due to its fragile or (until recently) inexistent regulatory  (financial) institutions, the Somali financial industry has been kept by the major world powers and financial hubs at the margins as the Somali remittance money is often allowed to be only transported physically from the western countries where most Somali diaspora is concentrated to the closest international commercial hubs and financial centres like Dubai where surrogate/alternative Somali trading markets have been established by Somalis. Over the years, many Somali MTCs as well as many other Somali companies engaged in the import sector have financial) institutions, the Somali financial industry has been kept by the major world powers and financial hubs at the margins as the Somali remittance money is often allowed to be only ttransported physically from the western countries where most Somali diaspora is concentrated to the closest international commercial hubs and financial centres like Dubai where surrogate/alternative Somali trading markets have been established by Somalis. Over the years, many Somali MTCs as well as many other Somali companies engaged in the import sector have established their Headquarters or at least their operational basis in Dubai where sizable amount of the supply and demand of the Somali trade meet. 

With the re-emergence of the Somali Federal institutions including the Central Bank of Somalia (CBS)Financial Reporting Centre (FRC) and other regulatory bodies, a lot has been accomplished in the recent years to reintegrate the Somali financial sector in the global economy in general and in the international payment circuits in particular. While these commendable efforts have borne some fruits, it might take some time before the expected reintegration of the Somali financial sector in the global financial industry. As matter of fact the bulk of the remittance money sent back home by the Somali diaspora via the Somali MTCs is still transported physically. This modus operandi, dictated bya combination of the war on terror, CFT and fragile Somali institutions, has been already costly, time-consuming and logistically cumbersome. 

Although major Somali MTC have now become commercial banks that are fully licensed and regulated by the CBS, most of these financial institutions are still at seminal stage. For instance, most of the new Somali commercial banks have no access to international payment circuits and mechanisms as of yet as the CBS itself is not yet fully reintegrated into these either. Consequently, the traditional MTCs continue to shoulder the life-saving task of transferring (physically) the Somali remittance cash from the Somali diaspora to finance basic needs including food, education, health and other necessities.

Furthermore, before the COVID-19 pandemic struck, the Somali financial sector has already been under huge pressure posed by some speculator forces disguised as financial brokers promising stratospheric profits under the fake pretext of FOREX, is visibly already in a serious difficult. These Ponzi schemes have dented significantly the liquidity at the nascent Somali financial institutions by taking huge amount of cash from the local markets.

4. Concluding remarks

Based on the foregoing preliminary analysis, it is obvious that the entire Somali economic and  financial ecosystems are far more vulnerable and at risk than most of the other fragile countries. An already fragile food security situation can worsen due to the impact of the COVID-19 pandemic, over more than half of the population needs already some sort of humanitarian aid. Few other places in the world, if any, is the average citizen so dependent on the globalized economy, particularly on the currently heavily disrupted or altogether halted supply chains of the importation of food, cash to buy food (i.e. remittance which is physically transported by air as Somalia is cut off from the international payment circuits), medicine and other necessities. In fact, at the backdrop of the above-cited “triple shock” (disrupted remittance, imports and scarce liquidity due to other internal financial stressors like the said ponzi schemes), in the wider context of one of the most complex protracted humanitarian emergencies, although the Somali markets have been generally calm as of the end of the third week of March 2020 it might be a matter of time before the prevailing global economic and financial crisis hits hard Somali markets too. Therefore, unless all relevant political, economic and social stakeholders come together under the leadership of the government institutions at all levels to devise an effective strategy, if and when (perhaps inevitably) the financial panic is set in Somali markets it will be difficult to manage the ensuing crisis without external support.

The situation demands a concerted effort on the part of all key stakeholders including SFG, FMs, Somali private sector and Somalia’s international partners. 

• Preliminary recommendations

1.  The Somali Federal Government (SFG) and its Federal Member States (FMs) should do  whatever is in their power to avert a catastrophic impact of the COVID-19 crisis in Somalia. Urgent measures including highly competent, multidisciplinary and multistate crisis management and coordination committee has to be put in place.
2. The SFG, in collaboration with the FMs and the private sector, has to exercise the highest pressure yet on its international partners to come to the rescue of Somalia and Somalis given the unique circumstances that make Somalia different from any other vulnerable country;
3.  Somalia’s international partners should support Somalis to facilitate the smooth functioning of the Somali money transfer industry as the imports of food and medicines are mainly financed with remittance money;
4. Both FMs and SFG, in close cooperation with the private sector, humanitarian community and the religious leaders, should put in place safety nets to enable the poorest sectors of the society to get access to food during the crisis;
5. To the extent possible, restrictions adopted to prevent widespread contagion of the COVID-19 should not hinder the logistics of the food supply chains both domestically (during the current Gu’ planting season) and internationally (food imports)
6. Well-targeted fiscal stimulus for the economy in general (particularly for the productive sector like agriculture) is highly desirable both at the federal and state level. However, the government should ensure that possible tax exemption for the food imports should not be captured by the rich food importers but the poor consumers.
7.  Small scale farmers should be supported for they are both food insecure and also responsible of the food production
8.  The challenges of the global COVID-19 crisis should be possibly transformed in opportunities for Somalis to become less dependent on massive food imports. In addition to the crop farming, the neglected but potentially rich fishing sector should be wisely utilized;
9. Continued public awareness raising campaign is needed not only on health and hygiene matters that are indeed crucial but also to prevent panic (food) purchasing and speculation.

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